Central Bank maintains interest rate at 13.75% per year

Central Bank maintains interest rate at 13.75% per year

The Monetary Policy Committee (Copom) of the Central Bank (BC) decided to maintain the basic interest rate – the Selic – at 13.75% per annum. It was the fourth decision followed by maintaining the rate. Thus, the interest rate remains at the highest level since December 2016.

This was the first meeting of the Committee of the Luiz Inácio Lula da Silva (PT) government.

According to a statement from BC, the decision was unanimous. Among the justifications for the decision, the Committee points out the perspective of global economic growth below potential and the maintenance of the inflationary scenario, although slightly less pressured.

“The external environment continues to be marked by the prospect of global growth below potential next year, high volatility in financial assets and a pressured inflationary environment, although with more positive signs at the margin. Monetary policy in advanced countries towards restrictive rates and greater sensitivity of markets to fiscal fundamentals require greater care on the part of emerging countries,” says the statement.

Regarding Brazilian economic activity, the Committee considered that “the set of most recent indicators continues to corroborate the expected slowdown scenario. Despite some cooling, both consumer inflation and its various measures of underlying inflation remain above the range compatible with the fulfillment of the inflation target”.

The Copom emphasized that, in relation to the inflation scenario, it considered some risk factors, such as the persistence of global inflation and the high uncertainty about the future of the country’s fiscal framework and fiscal stimuli.

Among the downside risks, the Committee points to a drop in international commodity prices in local currency, a more pronounced slowdown in global economic activity than projected, and (the maintenance of tax cuts projected to be reversed in 2023.

The decision was expected by the market, which also foresees a de-anchoring of inflation not only for 2023, but in longer periods, including years that are not yet the Copom’s target.

The Focus bulletin, compiled by BC to capture market expectations, shows that the median of expectations for this year’s inflation rose from 5.08% shortly after the December Copom meeting to 5.74% this week – almost 1 point above the target ceiling for the period.

For 2024, the current focus of the monetary authority’s activities, the projection was from 3.50% to 3.90%. The effect is also felt in 2025, with expectations rising from 3.02% in December to 3.50% now, and in 2026, rising from 3% to 3.5%. Even the projections for 2027, which began to be collected this month, have also increased, from 3.25% to 3.50%.

The inflation targets pursued by the Central Bank are 3.25% in 2023 and 3.00% in 2024 and 2025, with a tolerance margin of 1 percentage point. The 2026 target should be set this year by the government.

The last time the Central Bank changed the Selic was at the August 3 meeting, when it increased from 13.25% to the current 13.75%.

In the first decision to maintain the rate, on September 21, the Copom communiqué pointed out that, despite the maintenance, a new hike was not ruled out if “the disinflation process does not go as expected.”

Check out the Copom statement in its entirety:

The external environment continues to be marked by the prospect of global growth below potential next year, high volatility in financial assets and a pressured inflationary environment, although with more positive signs at the margin.

Monetary policy in advanced countries towards restrictive rates and greater sensitivity of markets to fiscal fundamentals require greater care on the part of emerging countries.

However, recent global activity data has been relatively resilient and the relaxation of sanitary restrictions in the Chinese economy alleviates the possibility of further disruptions in global supply chains;

Regarding Brazilian economic activity, the set of most recent indicators continues to corroborate the deceleration scenario expected by the Copom;
Despite some cooling, both consumer inflation and its various measures of underlying inflation remain above the range compatible with the fulfillment of the inflation target;

Inflation expectations for 2023 and 2024 calculated by the Focus survey are around 5.7% and 3.9%, respectively;

The Copom’s inflation projections in its reference scenario* stand at 5.6% for 2023 and 3.4% for 2024. The projections for administered price inflation are 10.6% for 2023 and 5.0 % for 2024. The Committee opted again to emphasize the horizon of six quarters ahead, referring to the third quarter of 2024, whose projection of accumulated inflation in twelve months is situated at 3.6%;

In an alternative scenario, in which the Selic rate is kept constant throughout the relevant horizon, inflation projections stand at 5.5% for 2023, 3.1% for the third quarter of 2024 and 2.8% for 2024; and

The Committee judges that the uncertainty surrounding its assumptions and projections is currently greater than usual.

The Committee points out that, in its scenarios for inflation, risk factors remain in both directions. Among the upside risks to the inflationary scenario and inflation expectations, the following stand out:

(i) greater persistence of global inflationary pressures;

(ii) the still high uncertainty about the future of the country’s fiscal framework and fiscal stimuli that imply sustaining aggregate demand, partially incorporated in inflation expectations and asset prices;

and (iii) a narrower output gap than the one currently used by the Committee in its reference scenario, particularly in the labor market. Among the downside risks, we highlight (i) an additional drop in international commodity prices in local currency; (ii) a sharper-than-projected slowdown in global economic activity; and (iii) the maintenance of tax cuts projected to be reversed in 2023.

The situation, which is particularly uncertain in the fiscal sphere and with inflation expectations moving away from the target over longer horizons, demands greater attention in the conduct of monetary policy. The Committee assesses that this situation raises the cost of the necessary disinflation to reach the targets established by the National Monetary Council. In this scenario, the Copom reaffirms that it will conduct the necessary monetary policy to meet the targets.

Considering the evaluated scenarios, the balance of risks and the wide range of information available, the Copom decided to maintain the basic interest rate at 13.75% pa

The Committee understands that this decision reflects the uncertainty surrounding its scenarios and a balance of risks with even greater variance than usual for prospective inflation, and is compatible with the strategy of convergence of inflation towards the target over the course of the relevant horizon, which includes the years 2023 and, to a greater extent, 2024.

Without prejudice to its fundamental objective of ensuring price stability, this decision also implies smoothing fluctuations in the level of economic activity and fostering full employment.

The Committee remains vigilant, evaluating whether the strategy of maintaining the basic interest rate for a longer period than in the reference scenario will be able to ensure the convergence of inflation.

The Committee reinforces that it will persevere until it consolidates not only the disinflation process but also the anchoring of expectations around its targets, which have shown deterioration in longer terms since the last meeting.

The Committee emphasizes that future monetary policy steps can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as expected.

The following members of the Committee voted for this decision: Roberto de Oliveira Campos Neto (president), Bruno Serra Fernandes, Carolina de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.

Source: CNN Brasil