How much interest rates can fall by the end of the current monetary easing cycle—as the Copom’s main tool for meeting the inflation target.
08/30/2023
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Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil
The Brazilian Central Bank’s Monetary Policy Committee (Copom) is likely to use the “budget” for cutting the basic interest rate—meaning, how much interest rates can fall by the end of the current easing cycle—as the main tool for meeting the inflation target.
The strategy was indirectly signaled by Central Bank President Roberto Campos Neto at an event Monday organized by Warren Rena. He stated that the Copom is committed to a 50-basis-point pace of interest rate cuts in the upcoming meetings, but he left uncertainty regarding the budget for interest rate cuts.
“We understood that the [key interest rate] still needed to be restrictive for some time,” said Mr. Campos Neto, referring to the discussions from the August meeting. “How restrictive is it? I can’t answer that now because much lies ahead.” According to him, this makes it difficult to signal “how and when will be the end.”
In August, the Copom lowered the economy’s key interest rates from 13.75% per year to 13.25%, more than most market analysts had expected. Many believed the Central Bank showed a certain inconsistency in starting to cut interest rates since its inflation projection for 2024, which makes up the majority of its monetary policy horizon, was at 3.4%—above the 3% target.
The message the Central Bank has sought to convey is that the monetary effort to meet the inflation target is achieved not only through the very short-term interest rate but also through future interest rates, which incorporate the market’s reading of how average interest rates will be this year and in the next.
The Copom delivered two central messages about the future. The first was that the pace of cuts in the upcoming meetings will be 50 bp per meeting, and the “bar” (or requirements) to do more than is a high one to hit. There would have to be substantial improvement in inflation dynamics.
Another indication is that interest rates should remain restrictive throughout the monetary policy horizon. How restrictive, as Mr. Campos Neto said, is still undeterminable. The Central Bank President indicated that this will be examined over time.
Basically, the Central Bank will observe the evolution of inflation, the main parameter being whether current and projected inflation is moving towards the 3% target set by Brazil’s National Monetary Council. The budget for interest rate cuts—and the degree of tightening and the rate at the end of the easing cycle—is the adjustment variable to ensure the target is met.
Before the August meeting, the market projected the start of a cycle with a 25-bp decrease, followed by eight more of 50-bp and a final 25-bp movement. Under these conditions, the Selic rate (Brazil’s key interest rate) would fall to 9.25% per year at the end of the easing cycle in December 2024. The Copom used this downward trajectory in its inflation projections, indicating a Consumer Price Index (IPCA) variation of 3.4% in 2024, which is over the 3% target.
At the Warren Rena event, Mr. Campos Neto discussed the difficulty of providing interest rate signals for such a long period due to all the uncertainties in the scenario. However, the Copom is relying on this slightly more distant part of the interest rate curve to meet the inflation target.
*Por Alex Ribeiro — São Paulo
Source: Valor International