The Monetary Policy Committee (Copom) warned that the de-anchoring of inflation expectations could lead to an extension of the interest rate hike cycle and that the pace of future adjustments in the Selic will be dictated by the “firm commitment to convergence of inflation to the target”.
“A further deterioration in expectations could lead to an extension of the monetary policy tightening cycle”, say the minutes of the meeting, released this Tuesday (12) by the Central Bank (BC).
Currently, the economy’s basic interest rate, the Selic, is at 11.25%, after an increase of 0.50 percentage points at the last meeting on November 5th and 6th. With the decision, the rate returned to the same level as January this year.
The increase consolidates a cycle of contraction in monetary policy. After spending a year at 13.75% per year, between August 2022 and August 2023, the rate had six cuts of 0.5 points and one cut of 0.25 points, between August of last year and May of this year. At the June and July meetings, the Copom decided to maintain the rate at 10.5% per year, starting to increase the Selic at the September meeting, when the rate rose 0.25 points.
Reviews
The decision to increase the Selic was criticized by entities such as the Associação Paulista de Supermercados (Apas) and the National Confederation of Industry (CNI), for whom the basic equilibrium interest rate should be 8.4% per year. The trade unions Central Única dos Trabalhadores (CUT) and Força Sindical also criticized the increase in the rate.
When justifying the increase in the Selic, the Copom said that the short-term scenario for inflation appears to be more challenging, especially with regard to services inflation, which remains above the level compatible with meeting the target.
“There was a reevaluation of food prices due to several factors, including the drought observed throughout the year. In relation to industrialized goods, the recent exchange rate movement puts pressure on prices and margins, suggesting a greater increase in such components in the coming months”, explains the committee.
The collegiate also pointed out that the perception of the financial market, expressed by the Focus bulletinon the growth of public spending and the sustainability of the fiscal framework, have been having relevant impacts on asset prices and expectations. Expectations for the Broad National Consumer Price Index (IPCA) for this year and 2025, ascertained by the Focus survey with financial market agents, are around 4.6% and 4%, respectively.
In the minutes, the Copom once again demanded adjustments in public spending and said that it will incorporate into its scenarios a slowdown in the growth rate of these expenses over time.
“A credible fiscal policy, based on predictable rules and transparency in its results, together with the pursuit of fiscal strategies that signal and reinforce the commitment to the fiscal framework in the coming years, are important elements for anchoring inflation expectations and for the reduction of risk premiums on financial assets, consequently impacting monetary policy”, says the document.
The Copom defended a countercyclical monetary and fiscal policy, with less incentive for economic activity, with the argument that it helps to ensure price stability. For the Copom, the reduction in spending growth, especially in a more structural way, can be an inducer of economic growth in the medium term through its “impact on financial conditions, the risk premium and the better allocation of resources.”
In relation to the labor market, the Copom clarifies that the scenario of a combination of a robust labor market, expansionary fiscal policy and vigor in granting credit to families remains. This scenario continues to indicate support for consumption and consequently for aggregate demand.
External environment
In Copom’s assessment, the external environment remains challenging, mainly due to the uncertain economic situation in the United States, which raises greater doubts about the pace of slowdown, disinflation and, consequently, about the stance of that country’s central bank, the Fed.
“With regard to the United States, there remains great uncertainty about the pace of disinflation and the slowdown in economic activity. In parallel, the possibility of changes in the conduct of economic policy also brings additional uncertainty to the scenario, particularly with possible fiscal stimuli, supply restrictions of work and introduction of tariffs on imports”, says the minutes.
In the reference scenario adopted by the committee, based on data from the Focus survey, the dollar will be R$5.75. The price of oil roughly follows the futures curve for the next six months and starts to increase by 2% per year thereafter. Furthermore, the hypothesis of a “yellow” tariff flag is adopted in December of this year, 2024 and 2025.
“Due to the uncertainties involved, the committee preferred a communication that reinforces the importance of monitoring scenarios over time, without providing a future indication of its next steps, insisting, however, on its firm commitment to convergence of inflation to the target”, points out Copom.
