Copom raises Selic by 0.5 point, to 13.75% per year, the same level as December 2016

The Monetary Policy Committee (Copom) of the Central Bank (BC) announced this Wednesday (3) a rise of 0.5 percentage point in the Selic. As a result, the basic interest rate in the economy went from 13.25% to 13.75% per year, the same level as in December 2016.

The decision came in line with general market expectations.

The current monetary tightening cycle began in March 2021, when the Selic rate dropped from an all-time low of 2% to 2.75%. Since then, the rate has risen 12 in a row.

The Central Bank’s main monetary policy instrument to control inflation, the Selic influences all interest rates in the country, such as loans, financing and financial investments.

Official inflation, measured by the IPCA, was 11.89% in 12 months, according to the latest data available from the IBGE, in June. The value easily exceeds the ceiling of the target set by the National Monetary Council (CMN) for 2022, of 5%. Target center is at 3.5%, with a tolerance range of 1.5 percentage points up or down.

The financial market estimate for this year’s IPCA is 7.15%, according to the Focus Bulletin.

In a statement released in June, the BC warned that inflation “continued to surprise negatively”. This time, however, the general expectation in the market is for a truce in prices at least for the next two months, in response, above all, to a recent downward movement in fuel prices.

See the full communiqué published by the committee:

At its 248th meeting, the Monetary Policy Committee (Copom) unanimously decided to raise the Selic rate to 13.75% pa

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

The external environment remains adverse and volatile, with major negative revisions to global growth in an inflationary environment that is still under pressure. The monetary policy normalization process in advanced countries has accelerated, impacting the prospective scenario and increasing asset volatility;
Regarding Brazilian economic activity, the set of indicators released since the last Copom meeting continued to indicate growth throughout the second quarter, with a stronger recovery in the labor market than was expected by the Committee;
Consumer inflation remains high, both in more volatile components and in items associated with underlying inflation;
The various measures of underlying inflation are above the range compatible with meeting the inflation target;
Inflation expectations for 2022, 2023 and 2024 determined by the Focus survey are around 7.2%, 5.3% and 3.3%, respectively; and
In the reference scenario, the trajectory for the interest rate is extracted from the Focus survey and the exchange rate starts from USD/BRL 5.30*, evolving according to the purchasing power parity (PPP). This scenario assumes an interest path that ends 2022 at 13.75% pa, reduces to 11.00% in 2023 and 8.00% in 2024. It is assumed that the price of oil approximately follows the future curve for the next six months and starts to increase by 2% per year thereafter. In addition, the hypothesis of a “yellow” tariff flag is adopted in December 2022, 2023 and 2024. In this scenario, Copom’s inflation projections stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024. Projections for regulated price inflation are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024. The baseline scenario projections incorporate the impact of the recently approved tax measures. For the six-quarter horizon, which smoothes the calendar-year effect, but incorporates the secondary impacts of the tax measures that apply between 2022 and the first quarter of 2023, the twelve-month accumulated inflation forecast stands at 3, 5%. The Committee believes that the uncertainty surrounding its assumptions and projections is currently greater than usual.
The Committee emphasizes that, in its scenarios for inflation, risk factors remain in both directions. Among the upside risks for the inflationary scenario and inflation expectations, the following stand out (i) a greater persistence of global inflationary pressures; and (ii) uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that imply support for aggregate demand, partially incorporated into inflation expectations and asset prices. Among the downside risks, the following stand out: (i) a possible reversal, albeit partial, of the increase in international commodity prices in local currency; and (ii) a more accentuated deceleration of economic activity than projected. The Committee considers that the possibility that fiscal measures to stimulate demand will become permanent accentuates the upside risks for the inflationary scenario. On the other hand, he notes that the increased risk of a slowdown in the global economy also accentuates downside risks. The Committee considers that the still particularly uncertain and volatile situation requires serenity in the assessment of risks.

It was noted that the inflation projections for the years 2022 and 2023 were subject to high impacts associated with tax changes between calendar years. Thus, the Committee chose at this time to emphasize the twelve-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothes the direct effects arising from tax changes, but incorporates their secondary impacts on inflation projections relevant to the monetary policy decision.

Considering the scenarios evaluated, the balance of risks and the broad set of information available, the Copom unanimously decided to raise the basic interest rate by 0.50 percentage point, to 13.75% pa The Committee understands that this decision reflects uncertainty around its scenarios and a risk balance with even greater variance than usual for prospective inflation, and is compatible with the strategy of converging inflation around the target over the relevant horizon, which includes the year 2023 and, to a lesser 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 promoting full employment.

The Copom considers that, given its projections and the risk of de-anchoring expectations for longer terms, it is appropriate that the monetary tightening cycle continues to advance significantly in an even more contractionary territory. The Committee emphasizes that it will persevere in its strategy until it consolidates not only the disinflation process but also the anchoring of expectations around its goals.

The Committee will assess the need for a minor residual adjustment at its next meeting. Copom emphasizes that it will remain vigilant and that future monetary policy steps may be adjusted to ensure the convergence of inflation to its targets. It also notes that the uncertainty of the current situation, both domestic and global, combined with the advanced stage of the adjustment cycle and its accumulated impacts yet to be observed, demand additional caution in its performance.

The following Committee members voted for this decision: Roberto de Oliveira Campos Neto (chair), 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.

*In update