Opinion – Vinicius Torres Freire: Without the optimism of March, the Central Bank says that crunch still goes a long way

The crunch will continue, as expected. The Central Bank increased the basic interest rate, the Selic, from 11.75% to 12.75% per year, as it had sworn in mid-March. But then, very optimistically, he had said that the tightening wave would end this month.

It won’t.

There will be at least one more increase at the June 15 meeting, unless peace descends in Ukraine, manna rains from the sky and the coronavirus disappears from China — and look there.

How much does Selic go to? For starters, probably 13.25% next month and 13.75% in September. At least.

The next government will start with an even greater burden on its back. If you say too much nonsense in the campaign and in the “transition”, it can ruin your chances of success right away.

The biggest interest rate tightening since 2013-2015 only ends when it ends, wrote the BC’s management in the statement of its decision this Wednesday: “… it is appropriate that the monetary tightening cycle continues to advance significantly in even more contractionary territory” … “until it consolidates not only the disinflation process but also the anchoring of expectations around its goals”.

The squeezing goes on until the 2023 inflation expectation returns to the target. There’s still ground.

What weighs more negatively, besides inflation still out of control and unpredictable? Worldwide cost and risk of public debt growing without limit (who knows what will become of the economic policy that will come out of the polls and if the next ruler of Brazil will have something inside his head).

What could mitigate future interest rate hikes? Commodity prices and dollar down; economy growing even less than forecast for 2022 (0.7%) and 2023 (1%).

Much of inflation is out of central banks’ control, unless they decide to push a recession deep as hell. For now, it does not seem to be the intention of the most important BC in the world, the American, which this Wednesday stated that it will not accelerate interest rate hikes there.

In addition to the domestic hardships of each customer, there are two international problems running rampant.

One is the Ukrainian War, with well-known implications for energy and food prices. There is no idea when the war will end or when there will be enough alternative sources of energy to mitigate the basic and more immediate economic damage of the conflict.

The other source of inflation is the “zero Covid” policy in China, a country that is the basic workshop of the world’s industry. If Chinese production is interrupted by “lockdowns”, there is a shortage of final products, parts and other industrial inputs.

Since mid-2020, it has been said that “in about six months”, the supply will return to normal. The next deadline to be missed now is the beginning of 2023. Until then, this inflationary pressure continues.

To make matters worse, consumer inflation in the world’s largest economy is beyond 8% a year, in part because of a tightening job market. Famine and the overheating of the American economy contaminate prices around the world.

This Wednesday, the Fed, the US Federal Reserve, raised its base interest rate to the range of 0.75% to 1% per year, in a rare increase of half a percentage point. It is possible that the rate will go to 2.75%-3% by the end of the year. Very? The real interest rate (ex post) would still be very negative. Inflation went from 2.6% per year in March 2021 to 8.5% in March 2022.

In addition to knowing what will become of world inflation, the question now is whether the US will be able to mitigate the rise in prices without heading into recession.