Copom holds first meeting under Lula under pressure from Planalto and inflation

Under the pressure of worsening inflation expectations of the financial markets, the Central Bank is expected to maintain the base interest rate (SELIC) at 13.75% per annum this Wednesday (1st) at the meeting of the Copom (Monetary Policy Committee) . Luiz Inácio Lula da Silva (PT) took office.

Despite the intense interest rate shock promoted by the Central Bank in an attempt to curb inflation, fiscal uncertainties and the noise generated by the top government – disturbed by the high level of interest rates – have contributed to the deterioration of projections on prices.

For Tony Volpon, former director of BC, all attention will be focused on the communication of the monetary authority on the deterioration of expectations. “The market expects this to be addressed in some way,” he says. “The big point of this Copom is what the BC will say about expectations for 2024, 2025. Everything in advance has increased a lot these last few weeks in the [boletim] Focus.”

The Focus survey, which captures the perception of private sector economists, shows that the National Index of Broad Consumer Prices (IPCA) projection for this year has jumped by 5.08% since the previous collegiate meeting, in December 2022 , to 5.74% in the data released last Monday (30).

This indicates that expectations for 2023 are already almost 1 percentage point above the inflation target ceiling. The central targets set by the CMN (National Monetary Council) are 3.25% in 2023 and 3% in 2024 and 2025, with a margin of tolerance of plus or minus 1.5 percentage points.

For 2024, the most relevant period for today’s performance of the BC, the expectation has increased from 3.5% to 3.9% in four weeks, already above the central target to be pursued. The worsening perception of the market was also reflected in longer-term projections, even in years not yet in Copom’s sights.

The movement comes on the heels of the prospect of an increase in administered prices with the possible reactivation of federal taxes on gasoline and ethanol starting in March. According to Minister Fernando Haddad (Finance), “until now” there are no new decisions on the matter.

One of the first acts of the new Lula government was the presentation of a provisional provision which extends the exemption from federal fuel taxes until the end of February.

“The most likely thing is that we have a decline in inflation rates by mid-year, and in the period from July to September, inflation in 12 months should rise,” predicts economist Heron do Carmo, professor at FEA -USP (Faculty of Economics and Administration of the University of São Paulo).

The increase will be felt compared to last year, when there were three consecutive months of deflation (from July to September). The decline in prices during that time was driven by tax cuts on fuel, electricity and other items.

The reduction in the tax burden occurred in the midst of Jair Bolsonaro’s (PL) re-election plans, frustrated by his defeat at the polls against Lula.

Caio Megale, chief economist of XP Investimentos and former adviser to the Ministry of Economy, expects Copom to speak on the importance of inflationary expectations in the BC’s next steps.

Given the worsening scenario, he expects the monetary authority to keep the Selic at its current level of 13.75% for the whole year. “I find it difficult for BC, which looks ahead to 2024, with market projections of inflation above [do centro da meta] and going up, they manage to cut interest rates [neste ano]”, He says.

The economist saw the possibility of reducing the Selic rate in the short term with the approval of the PEC (proposed amendment to the Constitution) which authorized the expansion of expenses of R$ 145 billion in 2023, in addition to authorizing R$ 23 billions in investment outside the tax norm and other measures.

“The size of the PEC, for me, was very important in this definition because it permanently determined a much higher level of spending and signaled the government’s readiness for a more expansionary fiscal policy,” he says.

For Megale, the space for the reduction of the basic rate could open up next year if the fiscal situation proves to be more balanced with the design of the law that will replace the spending ceiling – a mechanism that limits the growth of public spending to the recorded inflation in the previous year and should be replaced.

So far there is much uncertainty about the new fiscal framework: the proposal should be presented by April, according to government forecasts. “This milestone, if done well, is what will make room for interest rate cuts in 2024,” he predicts.

According to Sergio Werlang, former economic policy director of the BC and adviser to the presidency of the FGV (Fundação Getulio Vargas), the monetary authority should continue to insist on the fiscal issue.

“It’s the BC’s job to say, ‘if you keep stimulating demand, making my life more complicated, I’m going to have to hold this rate longer.’ That’s the message they need to get across,” he says.

He also points out that the postponement of the interest rate cut is already again on the account of economists. “The vast majority thought that by the middle of the year there would already be cuts, now I see it [essa expectativa ser recalibrada para] the third or fourth quarter. With all this pressure on spending, the BC will have more pressure on demand, this will increase inflation, force it to keep interest rates higher for a longer time,” he says.


Base interest rate

The Selic rate is the benchmark for other interest rates in the economy. It is the average rate practiced in negotiations with securities issued by the State Treasury, recorded daily with Selic (Special Settlement and Custody System).

real interest rate

Consider a nominal rate, the Selic, for example, discounting inflation

real rate ex ante

Calculated looking forward (expected rate), based on interest and inflation projections. It is the most relevant to monetary policy, as it influences future investment and consumption decisions

real ex-post rate

Calculated looking back (verified rate), for example based on interest and inflation over the past 12 months. It is used to evaluate an investment already made

Neutral rate or structural interest rate

The one that keeps inflation on target and GDP growth equal to its potential. It can only be obtained from estimates.

Effective real interest rate

Difference between real rate and neutral rate. When the real effective interest rate is positive (real rate above the neutral rate), monetary policy is against it: it contains economic activity and helps to reduce inflation. If it is negative (real rate below the neutral rate), it stimulates economic activity and contributes to higher inflation

Copom (Monetary Policy Committee)

Organ of the Central Bank, made up of its president and its administrators, which defines, every 45 days, the base interest rate of the economy, the Selic


Indicator measured by the IBGE which serves as an inflation target. The target is defined by the National Monetary Council, a body that sees the participation of the BC, the Minister of Finance or the Economy and other members of the economic team. The target for 2023 is 3.25%, with a limit of 4.75%. For 2024 and 2025, the expected target is 3%, with a limit of 4.5%

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