The Monetary Policy Committee (Copom) of the Central Bank considers an increase in the pace of Selic cuts to be “unlikely”, based on the current step of 0.5 percentage points, and reinforces the need to maintain a monetary policy that is still contractionary for the “relevant horizon”, until the convergence of inflation towards the target is consolidated.
The two messages are contained in the minutes of the meeting held by the collegiate last week, which ended for the second consecutive time with a reduction of 0.5 points in the basic interest rate – this time, from 13.25% to 12.75% per year .
The text, released this Tuesday, 26th, consolidated in the financial market the projection that the Selic could close the year at 11.75%, considering the announcement of two more cuts at the Copom meetings in early November and mid- December. This is the estimate of 52 institutions interviewed by Projeções Broadcast, out of a total of 60. Still based on the survey median, the current cycle of cuts should end in 2024 with the Selic at around 9%.
“Without a solid anchoring of expectations, the Central Bank will not change this rate of reduction in the Selic”, stated the chief economist at Banco Inter, Rafaela Vitória. For her, the minutes adopted a harsher tone, highlighting the BC’s concern with the external scenario – there is fear in the market that the Federal Reserve (the American central bank) will raise rates in the country again. “Stronger interest rates abroad put pressure on the exchange rate. We had upward surprises in the prices of some commodities, which have not yet hit consumer prices.”
The assessment of G5 Partners’ chief economist, Luís Otávio de Souza Leal, is also that the minutes corroborate the perception that the BC will not have room to accelerate the pace of Selic cuts this year. “In fact, considering that the end of the year will be good in terms of growth, I think it’s easier for Copom to reduce the pace to cuts of 0.25 percentage points than to accelerate to 0.75 points,” he said.
‘Unanimity’
In the minutes, Copom members speak in consensus about the collegiate’s next steps. “The committee members unanimously agreed with the expectation of cuts of 0.50 percentage points in the next meetings and assessed that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process”, says the text released yesterday. “The committee considers a further intensification of the pace of adjustments to be unlikely, as this would require substantial positive surprises that would further increase confidence in the prospective disinflationary dynamics.”
In this context, the panel reaffirmed the conditions that would indicate greater confidence in this process, such as “a much more solid re-anchoring of expectations, a forceful opening of the product gap (the space that GDP has to expand without stimulating demand inflation ) or a substantially more benign dynamic than expected in services inflation”.
Also according to the committee, the pace of 0.50 percentage points “combines the firm commitment to the re-anchoring of expectations and disinflationary dynamics and the adjustment in the level of monetary tightening in real terms given the more benign dynamics of inflation anticipated in the scenario projections of reference”.
Before last week’s meeting, part of the market believed that there could be at least a 0.75 point cut in the Selic at one of the next Copom meetings this year.
‘Distrust’
During his participation in the J. Safra Brazil Conference, yesterday in São Paulo, the director of Monetary Policy at the BC, Gabriel Galípolo, said that the market’s “distrust” in the execution of the new fiscal framework would be preventing the convergence of inflation expectations to the target of 3% in the coming years.
According to Galípolo, in comparison with the beginning of the year, positive surprises related to the conduct of fiscal policy improved prospects and dropped economists’ projections for next year’s primary deficit to 0.8%, as a proportion of Gross Domestic Product (GDP). .
He considered, however, that the partial de-anchoring of inflation expectations would be more related to the functioning of the framework than to the fulfillment of its targets. The director said he had already heard from investors in the market who prefer a scenario with a larger deficit, but with less fiscal impulse. “There is still distrust about the implementation of the framework, this is present,” he said, emphasizing that expectations are essential in the conduct of monetary policy.
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