Focused on inflation, Brazil’s Central Bank tends to ignore pressure from Lula and maintain interest rates

By Vandré Kramer

Once again under criticism from President Luiz Inácio Lula da Silva (PT) and ministers, the Central Bank of Brazil will set the basic interest rate on Wednesday (3), which serves as a reference for the cost of loans to companies and consumers.

The consensus among market analysts is that the Monetary Policy Committee (Copom) will ignore government pressure and maintain the Selic at its current level of 13.75% per year.

And judging by statements made by the president of the Central Bank, Roberto Campos Neto, the beginning of a fall in the rate does not seem close.

During the Labor Day holiday, in an event with union centrals, Lula criticized interest rates again, which he blames for unemployment – the unemployment rate rose to 8.8% in the mobile quarter that ended in March.

“We can no longer live in a country where the interest rate doesn’t control inflation; it controls, in fact, unemployment in this country because it is responsible for part of the situation we live in today,” he said.

Campos Neto, however, signals that the current levels and expectations of inflation do not allow a loosening of monetary policy.

“Short-term inflation has been falling, but very slowly. The cores are still high,” said Campos Neto in a hearing held on April 25 at the Senate Economic Affairs Committee (CAE).

Market expectations for future inflation, always highlighted by the Central Bank in its releases, have worsened since the committee’s last meeting on March 21 and 22.

Since then, the median of projections for the IPCA in 2023 went from 5.95% to 6.05%.

The bet for 2024 and 2025, to which the Central Bank pays even more attention, advanced from 4.11% to 4.18% and from 3.9% to 4%, respectively.

Two days after the hearing in the CAE, the president of the Central Bank spoke to the Senate plenary with the Ministers Fernando Haddad of Finance, and Simone Tebet, of Planning.

Campos Neto said the Central Bank does a technical job and “seeks to fulfill its mandate in financial stability always with the lowest possible cost to society.”

“We have a technical performance horizon that, for many times, differs from the political cycle, but that we understand – and that is why we were given autonomy – that it maximizes the gain for society in the long term,” he said.

Tebet, in response, said that the Central Bank cannot be based only on technical issues and needs to “have a focus on public policies and the growth of Brazil.”

“The Central Bank cannot consider that its actions are only technical.”

“They are technical, but they are also decisions that interfere with policy, especially its communiqués and its minutes,” the minister pointed out.

Haddad, in turn, said that the Brazilian economy would continue to slow down because of monetary policy to the point of directly impacting tax collection.

In the minister’s view, the Central Bank’s decisions must go hand in hand with the government’s fiscal policy.

Besides talking about inflation, the president of the Central Bank mentioned credit concessions, which have been decelerating slowly, to prevent a faster fall in the price indexes.

March data showed a 0.7% rise in loans compared to the previous month after two months of decline.

“The credit slowdown in Brazil is well below that of the developed world and much of the emerging world,” Campos Neto said.

The fiscal policy also worries the monetary authority, even with the presentation, at the end of March, of a new set of rules for public spending.

While praising the efforts of the economic team, Campos Neto said that the improvement in the perception of public accounts is still an ongoing process.

“When we look at the future curves [of interest rates], they show an inversion.”

“They have started to improve. With some measures that the government has taken, they have been following this trajectory of improvement.”

ANALYSTS PREDICT THAT COPOM WILL KEEP SELIC AT 13.75%

The bet on maintaining interest rates at 13.75% in the meeting that ends this Wednesday is practically unanimous in the market.

“Once again, the committee should reinforce its vigilant stance on monetary policy and perseverance in the disinflation process until the convergence to the targets on the relevant horizon,” says Itaú in a report.

Genial Investimentos argues that although the April inflation forecast has come in below expectations, the cores came in with a sharp acceleration, which worries the market.

Another fact that makes a near reduction in interest rates more difficult is the latest data from the credit market, which showed an acceleration in concessions.

“With this, expectations of maintenance of the basic rate in Brazil are renewed”, says the head of research at Genial, Eduardo Nishio.

XP Investimentos points out that the data published since the last Copom meeting do not suggest significant changes in the inflation scenario.

The economic activity indicators indicate a mild aggregate demand deceleration and a resilient labor market.

The brokerage expects the cycle of Selic cuts will start in August, with a reduction of 0.25 percentage points.

Suno Research is also betting on maintaining interest rates in this Wednesday’s meeting. But, for the analysis house, the economic scenario is better than months ago.

“Inflation is giving way, even at a slow pace; the international scenario has less deteriorated; credit concession and economic activity are decelerating; inflation expectations for longer horizons are more stable. And the fiscal rule was presented”, says chief economist Gustavo Sung.

He evaluates that a window of opportunity has opened for Copom to start an initial discussion about interest rate cuts.

“It could even lessen the harsh tone of the statement,” he says.

THE UNITED STATES ALSO SET INTEREST RATES ON WEDNESDAY

Hours before the Copom decision, the Fed (the American Central Bank) also set its basic interest rate.

The decision there should have less influence on the Brazilian one.

“The expectation is that the [US] monetary authority will end the cycle of interest rate hikes, taking the rate to 5% to 5.25% per year.”

“And in September of this year, the interest rate cut would already begin”, predicts Sung from Suno Research.

The economist evaluates that the market is quite optimistic, with North American inflation slowing down.

In the 12 months ending in March, it closed at 5%, according to the Bureau of Labor Statistics (BLS).

But there are still warning signs, such as food, energy, and services.

According to him, the recent episodes in the financial system – with the problems at SVB and Signature – seem under control.

But as there is still a cooling-off process in prices and financial uncertainties, the Fed should avoid any kind of sudden move.

Another factor leading to this outlook is the resilience of the American economy, points out the chief economist of Swiss bank Julius Baer, David Kohl.

The research director at US fund manager Janus Henderson, Matt Peron, points out that the GDP figure in the US – the economy grew by 1.1% in the first quarter – revealed a complex economic scenario with strong demand and inflation.

With this, the US would still not be out of the woods in the fight against lower inflation.

“With persistent inflation and lower earnings, markets may face some challenging months ahead,” he says.

C6 Bank economist Cláudia Rodrigues predicts a 0.25 percentage point hike in US interest rates.

“This increase would be necessary to drive the slowdown in inflation in a context of still strong demand,” she says. She does not foresee interest rate cuts until mid-2024 but says the start could be brought forward if there is a credit squeeze stemming from the collapse of some regional banks.

With information from Gazeta do Povo