Under Lula’s attack, Brazil’s Central Bank sets interest rates in the first meeting of the year

The eyes of the Presidential Palace are on the decision the Monetary Policy Committee (Copom) will take on Wednesday (1st) regarding the basic interest rate (Selic).

The market consensus is that it will be maintained at 13.75% per year to combat inflation and bring expectations closer to the target set by the National Monetary Council (CMN).

President Lula has criticized the interest rate policy.

In a meeting with deans of federal universities last 19th, he questioned the autonomous Central Bank and the current level of the Selic rate.

“What is the logic behind the market’s distrust of everything we talk about investment? I don’t see these people talking once about social debt”, he said on occasion.

He also criticized the current inflation target level of 3.25% for this year and 3% for 2024, suggesting that a target of 4.5% would be more adequate.

This generated huge uncertainty about the direction of future inflation, says Igor Velecico, chief economist and partner at Genoa Capital.

According to the Focus bulletin, inflation expectations for the medium and long term are increasing, which presents the estimates of institutions consulted weekly by the Central Bank.

The projections for the IPCA in 2023 have been increasing for seven weeks and have already reached 5.74%.

For next year, they are also increasing. They were 3.65% four weeks ago and are now at 3.90%.

The projections for the following years are similar.

The forecast for 2025 is for an inflation rate of 3.50%. Four weeks ago, it was 3.25%.

And for 2026, the numbers also varied in this direction.

According to XP Investimentos, it is a reflection of the risk of more expansionist fiscal and parafiscal policies (credit from public banks) ahead and the informal discussion that the CMN may change the inflation target for the next few years.

The worsening inflation expectations and doubts about fiscal policy also led to increases in the projections for the Selic rate itself.

Until October, the market believed the rate would end in 2023 at 11.25% per year. Now, the median of the projections is 12.5%.

In other words, there is still the expectation that the Central Bank will cut interest rates this year, but the perception is that there is less room for reductions.

Interest rates, therefore, will remain at high levels for longer.

This worsening mood is reflected in the prognoses for next year: the average point of expectations for the Selic at the end of 2024 went from 8% three months ago to 9.5%.

“The scenario for this year, and even for the following ones, is quite uncertain, given that we have important events ahead, such as the discussion of tax reform and the fiscal framework, among other agendas,” says Jaqueline Benevides, fixed income analyst at TC.

The superintendent of the Economic Advisory of the Brazilian Association of Commercial Banks (ABBC), Everton Gonçalves, points out that the maintenance of the Selic at the current level indicates a reduction in real interest rates due to the increase in inflationary expectations.

“However, [the Selic] remains in strongly contractionary terrain,” he highlights.

And also at the highest levels among the major economies.

COPOM’S “VIGILANT” POSTURE WILL BE MAINTAINED, BELIEVES ITAÚ

Itaú projects that Copom will reinforce its vigilant stance on monetary policy to persevere with the disinflation process until convergence to targets and the anchoring of expectations are achieved.

In the bank’s evaluation, the Committee will not hesitate to resume the adjustment cycle (i.e., interest rate hikes) if the process of reducing inflation expectations does not occur as expected.

“The committee should also signal that it sees symmetric risks to inflation, with additional warnings not only for the evolution of public accounts – particularly in light of the projects approved in Congress at the end of last year, with expectations of increased expenses – but also for the recent debates on the economic/monetary policy framework, in particular, discussions about the definition of inflation targets for the coming years, and their potential impacts on asset prices and anchoring expectations,” points out Itaú, in a report.

With information from Gazeta do Povo