Central Bank raises interest rates for the third time and Selic rises to 4.25%

Analysts project that the BC will maintain the policy of raising interest rates until the end of 2021 amid the advance of inflation

O Monetary Policy Committee (Copom) of Central Bank (BC) This Wednesday, the 16th, the basic interest rate of the Brazilian economy rose again, changing the Selic rate from 3.50% to 4.25% per year. This is the first time since 2015 that the board has increased the Selic rate in three consecutive meetings. The new increase of 0.75 percentage points was already expected by the financial market and continues the interest rate readjustment policy after almost six years of cuts or freezes at reduced levels. The collegiate had already adjusted the Selic with the same magnitude in March and May, raising the 2% rate to the current level. The new high leaves interest rates at the same stage as in February 2020. The Selic advance occurs amid rising inflation, which reached 8.06% in the 12 months ended in May, well above the target ceiling of 5.25% pursued by the Bank Central — with 3.75% center and 2.25% floor. Analysts even estimated that the authority would make use of a 1 percentage point advance in the Selic to prevent this year's inflationary pressures from contaminating expectations for 2022, when the BC will have the target of 3.50% — with a variation of 1.5 points percentage up or down. The financial market estimates that the Selic will end 2021 at 6.25% per year, according to the Focus Bulletin released this Monday, the 14th. The next meeting of the collegiate will be between the 3rd and 4th of August.

In a note, the Copom stated that it should make a new increase of 0.75 percentage points in the next meeting, raising the Selic to 5% per year, the same level as in October 2019. “However, a deterioration in inflation expectations for the relevant horizon may require a more timely reduction in monetary stimulus. The Committee points out that this assessment will also depend on the evolution of economic activity, the balance of risks and how these factors affect inflation projections,” the statement said. The national monetary authority also stated that it should promote the normalization of the basic interest rate to the level considered neutral, which, according to analysts, is close to 6.5% per year. “This adjustment is necessary to mitigate the spread of the current temporary shocks to inflation.” The collegiate also stated in a note that inflationary pressure is stronger than expected, and that the risk factors are in the rise of commodities and the Brazilian fiscal risk. “Despite the recent improvement in public debt sustainability indicators, the high fiscal risk continues to create an upward asymmetry in the balance of risks, that is, with trajectories for inflation above the projected in the relevant horizon for monetary policy”, he informed.

The new increase of 0.75 percentage points had already been signaled by the Central Bank at the last Copom meeting, in May. The perception that variations in Extended Consumer Price Index (IPCA) are more disseminated by different economic activities led analysts to consider the need for the monetary authority to act more incisively. The rise in inflation last month was led by the rise in electricity. In previous months, the inflationary vector was occupied by fuels — above all to Gasoline — and the foods. The new commodity price cycle should sustain the IPCA advance over the next few months, despite the market seeing room for the index to cool down. data of Focus Bulletin point out that economists and financial entities project inflation at 5.82% at the end of the year. The negative sentiment, however, is starting to transfer to the IPCA projections for 2022, which rose from 3.64% a month ago to 3.78% this Monday — the fifth consecutive week of upward revision.

Dollar appreciation and commodity appreciation contributed to the rise of the IPCA from the second half of 2020

The increase in the Selic rate impacts the formulation of bank interest rates and the taking of credit in the country. In general, when there is an increase in the basic rate, consumption decreases, since the “price of money” is higher. The low interest rate policy was adopted as a way to stimulate economic recovery, however, longer-lasting inflationary pressures than projected forced the reversal from the end of the first quarter of this year. In an interview with Young pan, Gustavo Loyola, former president of the national monetary authority, stated that the Central Bank “is balancing on thin ice” amid the increase in the Selic rate at a time when the economy has not yet fully recovered. “You have to be cautious in the process of raising interest rates to avoid a negative result in economic activity. In other words, the Central Bank cannot waste ammunition, it has to adjust the correct dose of interest rate hikes”, he said.

Inflation has been on the rise since the second half of 2020. The IPCA ended last year with an increase of 4.5%, the highest value since 2016. the beginning of the recovery of the global economies, mainly China. The soaring of the dollar in the first quarter of this year amid discussions of the 2021 budget and the risk of a greater deficit in public finances also contributed significantly to inflationary pressures. The cooling of the currency in recent weeks is pointed out by analysts as one of the factors that should lead the IPCA down until the end of the year.