Central bank holds Selic at 13.75% for fourth consecutive time and targets higher costs to bring inflation to target

In its first meeting of the year, the Central Bank’s Monetary Policy Committee (Copom) again decided to keep the Selic rate at 13.75%. For the fourth consecutive meeting, the authority chose not to change interest rates. The decision was unanimous.

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On 21 September last year, the Copom interrupted a cycle of 12 consecutive increases in the Selic, which began in March 2021.

There was unanimity among analysts and economists that the interest rate would be kept at its current level. Now the market is looking at the press release accompanying the decision, trying to understand how the monetary authority evaluates the current inflationary risks and if there has been a change of tone in the discourse on the subject.

The text begins by citing fears of a global recession and the volatility of financial assets.

“The external backdrop is still characterized by the prospect of below-potential global growth next year, high volatility in financial assets and a pressured inflationary environment, albeit with more positive signals at the margins,” the statement reads. Note.

But Copom also points out that recent data on global activity has been “relatively resilient”. He also points out that the easing of health restrictions in the Chinese economy “relieves the possibility of further disruptions in global supply chains”.

As regards the internal scenario, the collegiate assesses that the most recent indicators continue to corroborate the deceleration scenario envisaged by the BC.

However, he points out that both consumer price inflation and the various measures of underlying inflation remain “above the range compatible with achieving the target”.

In scenarios with the risk of rising inflation, Copom mentions the greater persistence of global inflationary pressures and the uncertainty over the future of the country’s fiscal framework.

“The situation, particularly uncertain in the fiscal perimeter and with inflation expectations moving away from the target over longer horizons, requires greater attention in the conduct of monetary policy”, reads the press release accompanying the decision.

Therefore, Copom strengthened its vigilant stance and said that the decision to keep the Selic rate at 13.75% reflects the uncertainties surrounding its scenarios, as well as “a balance of risks with even higher variance than usual for prospective inflation”.

Read the press release in full:

The Monetary Policy Committee (Copom) in its 252nd meeting decided to maintain the Selic rate at 13.75% per annum

The update of the Copom scenario can be described with the following observations:

The external context continues to be characterized by the prospect of below-potential global growth next year, by high volatility of financial assets and by an inflationary environment under pressure, albeit marginally with more positive signs.

The monetary policy of advanced countries towards restrictive rates and a greater sensitivity of the markets to fiscal fundamentals require greater attention from emerging countries.

However, recent global activity data has been relatively resilient and the easing of health restrictions in the Chinese economy alleviates the possibility of further disruption to global supply chains;

As far as Brazilian economic activity is concerned, the set of the most recent indicators continues to corroborate the deceleration scenario envisaged by Copom;

Despite some cooling, both consumer price inflation and its various measures of underlying inflation remain above the range compatible with achieving the inflation target;

Inflation expectations for 2023 and 2024 calculated by the Focus survey are respectively around 5.7% and 3.9%;

Copom’s inflation projections in its reference scenario* stand at 5.6% for 2023 and 3.4% for 2024. The inflation projections for administered prices are 10.6% for 2023 and 5.0% for 2024. The Committee has once again chosen to emphasize the horizon of six quarters ahead, referring to the third quarter of 2024, whose projection of cumulative inflation over twelve months is 3.6%;

In an alternative scenario, in which the Selic rate is kept constant throughout the reference horizon, inflation projections stand at 5.5% for 2023, 3.1% for the third quarter of 2024 and 2, 8% for 2024; And

The Committee believes that the uncertainty surrounding its assumptions and projections is currently greater than usual.

The Committee stresses that, in its inflation scenarios, risk factors go both ways. Upside risks to the inflationary scenario and inflation expectations include (i) the greater persistence of global inflationary pressures; (ii) the still high uncertainty about the future of the country’s fiscal situation and about fiscal stimuli which imply support for aggregate demand, partially incorporated in inflation expectations and asset prices; and (iii) a narrower output gap than the one currently used by the Committee in its reference scenario, particularly in the labor market. Downside risks include (i) a further drop in the prices of international commodities in local currency; (ii) a more marked than expected slowdown in global economic activity; and (iii) the continuation of the tax relief which is expected to be revoked in 2023.

The situation, particularly uncertain in the fiscal area and with inflation expectations moving away from the target over longer horizons, requires greater attention in the conduct of monetary policy. The Committee assesses that this situation increases the cost of disinflation necessary to achieve the goals set by the National Monetary Council. In this scenario, Copom reiterates that it will conduct the monetary policy necessary to achieve the objectives.

Considering the scenarios assessed, the balance of risks and the wide range of information available, Copom has decided to maintain the base interest rate at 13.75% per annum

The Committee understands that this decision reflects the uncertainty surrounding its scenarios and a balancing of risks with an even larger-than-usual bias for forward inflation, and is compatible with the strategy of converging inflation towards target over the course of horizon, which includes the years 2023 and, to a greater extent, 2024. Without prejudice to its fundamental objective of ensuring price stability, this decision also implies smoothing out fluctuations in the level of economic activity and promoting full employment .

The Committee remains vigilant, assessing whether the strategy of maintaining the base interest rate for a longer period than in the reference scenario will be able to ensure inflation convergence.

The Committee reiterates that it will persevere until not only the disinflation process consolidates, but also the anchoring of expectations around its objectives, which have shown a long-term deterioration since the last meeting. The Committee stresses that future monetary policy measures can be adjusted and will not hesitate to resume the adjustment cycle if the disinflation process does not go as planned.

The following Committee members voted in favor of this decision: Roberto de Oliveira Campos Neto (President), Bruno Serra Fernandes, Carolina de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.

* In the baseline scenario, the interest rate path is taken from the Focus survey and the exchange rate starts at USD/BRL 5.15, evolving according to purchasing power parity (PPP). The price of oil roughly follows the forward curve for the next six months and increases by 2% annually thereafter. The hypothesis of a “yellow” tariff flag in the months of December 2023 and 2024 is also adopted. The exchange rate is obtained with the usual rounding procedure of the average rate of the USD/BRL exchange rate observed in the five working days ending on the last day of the week before of the Copom meeting.

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