For analysts, Copom indicated it could keep Selic at 13.75% for longer than expected

The recent deterioration of inflation expectations, the risk of rising costs of disinflation and the strengthening of concerns on the fiscal scenario in the change of government were the highlights of the statement of the Monetary Policy Committee (Copom) to justify its policy decision monetary policy this Wednesday (1 ), according to analysts’ assessment. This time, the BC even included an alternative scenario in its comments, holding the Selic rate at 13.75% for a longer period of time.

Andrea Damico, partner and chief economist of Armor Capital, underlined that Copom has made a slight modification to the section that mentions the possibility of maintaining the rate, changing the “sufficiently prolonged period” to “a longer period” as a strategy to guarantee the convergence of inflation to the target. “It’s a message of interest that has been standing still for some time, more than what’s in the (Bulletin) Focus,” she said live from Money info.

That is, a 12.5% ​​rate at the end of 2023 is not Copom’s flight plan because it will need more interest rates to bring inflation on target, Andrea said.

Also live, Anna Reis, partner and chief economist of Gap Asset, commented on another important excerpt from the press release, which led to an inflation projection for 2024 of 3.4%, if current conditions persist. The previous projection was 3%.

According to the BC, to reach a rate of 2.8% at the end of 2024, an alternative scenario is outlined with the Selic at the current 13.75% “over the entire reference horizon”. “The message is that Focus’s trajectory is inadequate: ‘Economists, postpone your cut projections, I see the cuts a little later,'” said Ana Reis.

Adauto Lima, chief economist at Western Asset, agrees that the message was very clear that fiscal uncertainty, a major driver of deteriorating expectations, will make the central bank more cautious, holding the rate at 13.75% for longer. long. previously expected. “It shows that the cost of disinflation has increased. As expectations get worse, it needs tighter monetary policy for a longer time, which increases the effect on output to have the same effect on inflation,” he explained.

André Francisco Nunes de Nunes, chief economist of Sicredi, recalled that the BC has already worked with a “moving window” for inflation convergence, exchanging the calendar years with a horizon of six quarters ahead. “From this we infer that the BC sees this unanchored inflation, but does not appear to be resuming a bull cycle right now. Work with this scenario of maintaining the current level for a longer period. This will surely force the market to revise its rate cut expectations for the second half of the year,” he commented.

XP Investimentos noted that the Copom included in the press release hints at the current scenario, particularly uncertain on the fiscal side and with inflation expectations moving away from the inflation target over longer horizons, which requires greater attention in risk assessment. “The Committee assesses that this scenario increases the cost of disinflation needed to meet the targets set by the National Monetary Council.”

“In our view, Copom’s pronouncement reinforces our baseline scenario in which the Selic will remain stable at 13.75% through early 2024, which was the XP projection since December.”

Public spending

Idean Alves, partner and head of the operations office of Ação Brasil, believes that Copom has expressed its unease with the pressure for more public spending. “The autonomy of the Central Bank under discussion, the end of the PIS/Cofins incentive on fuel, the increase in electricity and the new adjustment of the minimum wage, added to social benefits, together with the necessary increase in the tax burden for the increase in public spending must undoubtedly fall on businesses, which will have to have repercussions via “price” on consumers”, he highlighted

All this context, according to Alves, makes it more difficult for the CB to conduct the monetary policy necessary to achieve the objectives. This will “force” interest rates to stay high for a longer period of time.

Luca Mercadante, an economist at Rio Bravo, also highlighted the proposition of an alternative scenario, in which the monetary authority keeps the interest rate stable over the reference horizon. “Keeping the Selic at its current level, at the end of the cycle, the BC reaches 2.8% inflation in 2024, slightly below target. Then, the BC says it evaluates the scenario where the Selic stays at 13.75% longer than expected,” he analyzed.

For Mauricio Oreng, superintendent of macroeconomic research in Santander, through this alternative simulation, the BC may want to demonstrate that, in its models, an uncut trajectory in the Selic to 2024 leaves the HICP much closer to its targets, than that current consensus path for the Selic rate.

Mercadante also cited the release’s comment on the difficulties of the fiscal scenario and the deterioration of inflation expectations, especially in the long term. “In our interpretation, we understand that the statement has taken on a rather harsh tone, giving less room for interest rate cuts throughout the year,” he predicted.

Antonio van Moorsel, chief strategist of Acqua Vero, disagrees with the other analyzes because he said he expected an even more “falconer” statement. “Autarchy has reiterated arguments recurring in the recent past to justify the collegial decision, such as uncertainty about the fiscal trajectory, the adoption of fiscal policies that stimulate aggregate demand and the discouragement of inflationary expectations,” he said.

“The austerity message fell short of expectations, given fiscal uncertainty and ongoing discussions, and will likely be interpreted as ‘dovish’ by the markets in tomorrow’s session”.

Goldman Sachs agrees that the deteriorating inflation projections for 2023 and 2024, and the fact that Copom is very focused on the highly uncertain fiscal policy outlook and rising medium-term inflation expectations, implies that the central bank it will likely resist strongly against premature monetary policy easing.

“In our assessment, the most likely scenario is that Copom is stable and patient and keeps the base interest rate in its current significantly tight monetary stance for some time. Therefore, we expect Copom to wait until at least the third quarter of 2023 to start gradually reducing rates, possibly after that. In the short term (between 4 and 6 months) the risk that the Selic will have to rise even more is very low”.

Vinicius Romano, fixed income analyst at Suno Research, however said that the central bank has made it clear that its main objective is to consolidate not only the disinflation process but also the anchoring of expectations around its targets over the horizon of reference.

In practice, when assessing the allocation between fixed income assets (post, pre and HICP+), Romando said he understands that the current Selic level continues to provide a good yield with low risk for post-fixed securities, as these do not suffer from volatility and are proportionally affected by changes in the base interest rate.

“In the case of inflation-linked bonds (HICP+), we understand that recent rate cuts bring an attractive medium- to long-term burden, as credit-free bonds (Tesouro Direto) offer a real interest rate above 6 % per year,” he commented.

In the case of fixed rates, our understanding is that there are good options with a shorter ‘maturity’, but the class is less advantaged by worsening long-term inflation expectations and a Central Bank signal that interest rate cuts interest are not so close.”

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