Copom maintains interest rate at 13.75% for the third consecutive time

The Copom (Monetary Policy Committee) of the Central Bank (BC) decided this Wednesday (7) to maintain the basic interest rate, the Selic, at 13.75% per annum.

In a statement, the Committee justifies its decision, which was unanimous among the members present at the meeting, citing “uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that imply sustaining aggregate demand, partially incorporated in inflation expectations and prices asset”.

“The situation, particularly uncertain in the fiscal sphere, requires serenity in risk assessment. The Committee will follow with special attention future developments in fiscal policy and, in particular, their effects on asset prices and inflation expectations, with potential impacts on the dynamics of prospective inflation”, says the note.

The justification also goes through the deceleration of global economic activity more accentuated than projected. As in previous decisions, the inflationary scenario and domestic economic prospects also weighed.

“Regarding Brazilian economic activity, the release of the GDP pointed to a more moderate growth pace in the third quarter. The set of most recent indicators corroborates the deceleration scenario expected by the Copom; Despite the recent drop, especially in volatile items and affected by tax measures, consumer inflation remains high”.

This is the third time in a row that the Committee has decided to stabilize the rate, after a sequence of 12 hikes, starting in March 2021, when the Selic rate was at 2% per annum. The current level is the highest since November 2016, when the base rate was 14% per annum.

The last meeting in which the rate was changed, on August 3, there was an increase of 0.5 percentage points. 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.”

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 full:

At its 251st meeting, the Monetary Policy Committee (Copom) decided to maintain the Selic rate at 13.75% pa

The update of the Copom scenario can be described with the following observations:

The external environment remains adverse and volatile, marked by the prospect of global growth below potential next year, high volatility in financial assets and an inflationary environment that is still under pressure. 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;

Regarding Brazilian economic activity, the release of the GDP pointed to a more moderate growth pace in the third quarter. The set of most recent indicators corroborates the deceleration scenario expected by the Copom;

Despite the recent decline, especially in volatile items and those affected by tax measures, consumer inflation remains high;

The various underlying inflation measures remain above the range compatible with meeting the inflation target;

Inflation expectations for 2022, 2023 and 2024 calculated by the Focus survey are around 5.9%, 5.1% and 3.5%, respectively; and
In the reference scenario, the interest rate path is taken from the Focus survey and the exchange rate starts at USD/BRL 5.25*, evolving according to purchasing power parity (PPP).

The price of oil roughly follows the forward curve for the next six months and then increases by 2% per year thereafter. In addition, the hypothesis of a “green” tariff flag in December 2022 and a “yellow” one in December 2023 and 2024 is adopted. In this scenario, Copom’s inflation projections stand at 6.0% for 2022, 5.0% for 2023 and 3.0% for 2024.

Projections for regulated price inflation are -3.6% for 2022, 9.1% for 2023 and 4.2% for 2024. The Committee opted again to emphasize the horizon of six quarters ahead, which reflects the relevant horizon, softens the direct effects arising from tax changes, but incorporates their secondary impacts.

In this horizon, referring to the second quarter of 2024, the twelve-month accumulated inflation projection stands at 3.3%. 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 highlights are (i) greater persistence of global inflationary pressures; (ii) the high uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that imply sustaining aggregate demand, partially incorporated into 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, particularly uncertain in the fiscal sphere, requires serenity in risk assessment. The Committee will closely monitor future developments in fiscal policy and, in particular, their effects on asset prices and inflation expectations, with potential impacts on prospective inflation dynamics.

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 converging inflation towards the target over the relevant horizon, which includes the years 2023 and 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 will remain vigilant, evaluating whether the strategy of maintaining the basic interest rate for a sufficiently prolonged period 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.

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, Paulo Sérgio Neves de Souza and Renato Dias by Brito Gomes.

*Value obtained by the usual procedure of rounding the average quotation of the USD/BRL exchange rate observed in the five business days ending on the last day of the week prior to the Copom meeting.