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SÃO PAULO – The Monetary Policy Committee (Copom) decided on Wednesday (17) to raise the Selic rate by 0.75 percentage points, to 2.75% per year, in the first increase in the interest rate in Brazil in almost six years .
The result was not a surprise, but it was not what most analysts expected. There was no unanimity in the market, but the main projection pointed to an increase of 0.5 pp, not totally ruling out an increase of 0.75 pp or even 1 pp.
Also read: risk assets remain in the managers’ preference even with 2.75% Selic
The last time the Copom raised the Selic rate in the country was on July 29, 2015, when the basic interest rate went from 13.75% to 14.25%. Three months later, the cutting cycle began.
Before raising the interest rate now, there were nine cuts followed by four maintenance cuts. And this should be just the beginning of a new cycle, as according to the most recent BC Focus report released this week, the market now projects the Selic to end the year at 4.5%.
A combination of a still weak economy, with rising inflation – and staying above the center of the goal – a rise in the dollar against the real and a situation of increased public spending due to the pandemic, reinforces the market’s vision. that rates should keep improving.
Analysts have already pointed out in recent days that the scenario has deteriorated significantly since the last meeting of the BC, especially with the recent decision of the Federal Supreme Court (STF) to annul the sentences of former president Lula, creating a scenario of great polarization in the country. country.
On the external side, the scenario has also been more challenging due to the increase in Treasury bonds and raw materials, in addition to the adjustments in the markets due to the economic recovery.
In its statement, the Committee highlighted that in its basic inflation scenario, the risk factors remain in both directions. “On the one hand, the worsening of the pandemic may delay the process of economic recovery, producing an inflation trajectory below expectations,” the text says.
Already under upward pressure, the BC highlighted the prolongation of fiscal policies in response to the pandemic, which could worsen the country’s fiscal trajectory, in addition to possible frustrations in relation to the continuity of the reforms.
Regarding the level of the increase made today, the Copom assesses that “a faster adjustment strategy of the stimulus level has the benefit of reducing the probability of not meeting the inflation target this year, as well as maintaining the anchoring of expectations of longer “.
“Furthermore, the wide range of information available to Copom suggests that this strategy is compatible with meeting the goal in 2022, even in a scenario of temporary increase in social isolation,” the statement said.
Finally, the CB has already indicated that for the next meeting, scheduled for May 4 and 5, it must maintain the rate of increase, that is, raise the Selic rate again by 0.75 pp, in case there is no significant variation in inflation projections. or in the balance of risks.
Read the full statement:
At its 237th meeting, the Monetary Policy Committee (Copom) unanimously decided to raise the Selic rate to 2.75% per annum.
Copom’s basic scenario update can be described with the following observations:
- In the external scenario, the new fiscal stimuli in some developed countries, together with the progress in the implementation of immunization programs against Covid-19, should promote a more robust recovery in activity throughout the year. The presence of laziness, as well as the communication of the main central banks, suggests that the monetary stimuli will last for a long time. However, questions from the markets about inflationary risks in these economies have led to a revaluation of financial assets, which can make the environment challenging for emerging economies;
- In relation to the Brazilian economic activity, recent indicators, in particular the disclosure of GDP in the fourth quarter, continued to indicate a consistent recovery of the economy, despite the reduction of income recovery programs. However, these readings do not yet address the possible effects of the recent increase in the number of Covid-19 cases. On a prospective basis, the uncertainty about the growth rate of the economy remains above normal, especially for the first and second quarters of this year;
- The continuation of the recent rise in the price of international raw materials in local currency has affected current inflation and caused further increases in projections for the coming months, especially through its effects on fuel prices. Despite the fact that short-term inflationary pressure has turned out to be stronger and more persistent than expected, the Committee maintains the diagnosis that the current shocks are transitory, but remains attentive to their evolution;
- The various measures of underlying inflation are at levels above the range compatible with meeting the inflation target;
- Inflation expectations for 2021, 2022 and 2023 determined by the Focus survey are around 4.6%, 3.5% and 3.25%, respectively; Y
- In the basic scenario, with a trajectory for the interest rate extracted from the Focus survey and the exchange rate starting at R $ 5.70 / US $ *, and evolving according to purchasing power parity (PPP), the projections Copom’s inflation rate is around 5.0%. for 2021 and 3.5% for 2022. This scenario assumes an interest trajectory that increases to 4.50% per year this year and to 5.50% per year in 2022. In this scenario, the managed price inflation projections are 9.5% for 2021 and 4.4% for 2022.
The Committee highlights that, in its basic inflation scenario, the risk factors remain in both directions.
On the one hand, the worsening of the pandemic may delay the economic recovery process, producing a lower inflation trajectory than expected.
On the other hand, a prolongation of fiscal policies to respond to the pandemic that worsens the country’s fiscal trajectory, or frustrations in relation to the continuity of the reforms, may increase risk premiums. The high fiscal risk continues to generate an upward asymmetry in the balance of risks, that is, with inflation trajectories above the projected horizon relevant to monetary policy.
The Copom considers that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential to allow the sustainable recovery of the economy. The Committee also highlights that questions about the continuity of reforms and permanent changes in the process of adjusting public accounts can raise the economy’s structural interest rate.
Considering the basic scenario, the balance of risks and the wide range of information available, Copom unanimously decided to raise the basic interest rate by 0.75 percentage point, to 2.75% per annum. The Committee understands that this decision reflects its basic scenario and a balance of risks of variance higher than usual for prospective inflation and is compatible with the convergence of inflation to the target in the relevant horizon, which includes calendar year 2021 and, mainly in 2022.
Members of Copom believe that the current scenario no longer prescribes an extraordinary degree of encouragement. GDP closed 2020 with strong growth at the margin, recovering most of the decline observed in the first half, and inflation expectations began to be above the target in the relevant monetary policy horizon. In addition, inflation projections were raised to levels close to the upper limit of the goal in 2021.
Consequently, the Copom decided to initiate a partial normalization process, reducing the extraordinary degree of monetary stimulus. For all the factors listed above, the Committee considered appropriate an adjustment of 0.75 percentage points in the Selic rate. In the Committee’s assessment, a faster adjustment strategy for the stimulus level has the benefit of reducing the probability of not meeting this year’s inflation target, as well as keeping expectations anchored for longer horizons. Furthermore, the wide range of information available to Copom suggests that this strategy is compatible with meeting the goal in 2022, even in a scenario of temporary increase in social isolation.
For the next meeting, unless there is a significant change in inflation projections or in the balance of risks, the Committee expects the continuation of the process of partial normalization of the monetary stimulus with another adjustment of the same magnitude. Copom points out that this vision for the next meeting will continue to depend on the evolution of economic activity, the balance of risks and inflation projections and expectations.
The following members of the Committee voted in favor of this decision: Roberto Oliveira Campos Neto (chair), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio Kanczuk, Fernanda Feitosa Nechio, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso and Paulo Sérgio Neves de Souza.
* Amount obtained by the usual procedure of rounding the average R $ / US $ exchange rate observed in the five business days ending on the last day of the week prior to the Copom meeting.
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