In the minutes, Copom maintains a tough tone, but waves to Haddad’s measures, say analysts

The Monetary Policy Committee (Copom) released this Tuesday (7th) the minutes of the most recent meeting that kept the Selic rate at 13.75%, continuing its harsh tone regarding the commitment to fight inflation, but pointing to measures tax announced by the Ministry of Finance, in the view of the market.

“The Copom minutes brought more details about the discussions of the last monetary policy committee, highlighting the positive mention of the package of measures announced by the Ministry of Finance, which may mitigate the risk of fiscal expansion this year”, highlighted Rafaela Vitória, Chief Economist at Inter.

According to the economist, this is an important signal that shows that the fiscal adjustment can contribute to the convergence of inflation to the target and reduce the cost of monetary policy.

Haddad and the government’s economic team announced a few weeks ago a package focused on cutting expenses, with the aim of improving the country’s fiscal situation, reducing the gap in public accounts.

In an interview with CNN the Secretary for Economic Policy at the Treasury, Guilherme Mello, said that Brazilian investors will start to have more confidence from the moment the measures start to be implemented.

Despite acknowledging the Treasury’s efforts, analysts considered that the basic interest rate should remain high, while criticism of the current Selic level increases the tension surrounding the BC’s monetary policy.

“In the current scenario of uncertainty and even without the proposed new fiscal framework, the Selic rate should remain high for longer. The recent political questions about the independence of the Central Bank do not contribute to the scenario and end up generating more uncertainty and raising risk premiums”, added Rafaela Vitória.

Postponement of monetary tightening

Experts pointed out that the high interest rate cycle should drag on longer than the projections initially indicated. “The Central Bank emphasized the rise in inflation expectations and should postpone the interest rate reduction cycle. The communiqué suggested that, in the current flight plan, the BC should keep the Selic stable at 13.75% per year until 2024, therefore postponing the beginning of the interest rate reduction cycle”, said C6 Bank.

For Étore Sánchez, chief economist at Ativa Investimentos, the Copom was “considered”, but brought a tough message in the minutes of the meeting held on February 1st.

“The authority brought signs that it will keep interest rates stable for longer. For now, we maintain our call that the Selic should start the low cycle only in 2024, but, in view of today’s communication, conduction may even, eventually, be even more rigid”, he added.

Finally, Alberto Ramos, from Goldman Sachs, highlighted that although the Copom recognizes that activity and credit are slowing down, and the labor market is settling down, the Committee expects that these trends will continue as it sees this as “necessary to for the monetary policy channels to act and for inflation to converge to its targets”.

“The Copom made a great effort to communicate that it will not be lenient in the quest to bring inflation back to the target and warned that the fiscal stimulus to demand should be evaluated taking into account the stage of the economic cycle and the degree of idleness of the economy” .

For the economist, the BC should wait at least until the end of the 3rd quarter of 2023 to start gradually reducing rates, despite the chances of the municipality raising the Selic rate being “even lower”, in his assessment.