Analysts’ median projection for Selic at end of 2023 was stable this week at 10.5%
07/12/2022
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Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal
Economic analysts have once again increased their inflation projections for 2024 and continue to bet on cuts in the basic interest rate in 2023, shows the Focus survey, released on Monday morning.
Overall, this movement in expectations reveals that the financial market is questioning the strategy of the Central Bank’s Monetary Policy Committee (Copom) of raising interest rates less now, but avoiding cuts next year.
At its last meeting in June, the committee said that if it raises the key interest rate less in the next few meetings, combined with keeping interest rates higher in 2023, it could bring inflation down “around the target” as early as 2023.
On that occasion, the Copom disclosed an alternative projection for inflation that shows that if interest rates were maintained at 13.25% per year during 2023, projected inflation for 2023 itself would drop to 3.7% from 4%. At this percentage, it would still be above the target, set at 3.25%, but the committee considers that it would be close enough to the target, given the great uncertainties affecting the economic scenario.
The Focus survey shows that, at least for now, the market has not bought the thesis of higher interest rates in 2023. The median projection of analysts for the Selic policy interest rate at the end of 2023 was stable this week, at 10.5% per year.
The market has doubts if, in fact, the Copom will keep interest rates stable in 2023 because, if it does, the inflation projected by the Central Bank itself for 2024 would be too low. In mid-June the Central Bank projected inflation at 2.7% for 2024, already below the center of the year’s target of 3%.
Some experts noted, when the Central Bank unveiled its strategy of higher interest rates for longer, that it is inconsistent with the usual way the Copom acts. The natural thing to do would be for the Central Bank to take care of inflation for the following year, cutting interest rates so that they do not get too low.
Moreover, the Central Bank’s own policy director, Diogo Guillen, said in the Inflation Report interview that signaling higher interest rates for longer in 2023 was not forward guidance. Forward guidance could tie the hands of the Central Bank and force it to keep interest rates higher even if circumstances over time suggest it should do otherwise.
Another set of data from the Focus survey that puts the Central Bank’s strategy in doubt is the evolution of market inflation expectations.
In the case of the figures projected for 2023, they rose to 5.09% from 5.01% last week. The figures expected for 2024 rose to 3.3%, against a target of 3%, after remaining stable at 3.25% for several weeks.
In part, this is a sign of market disbelief that the Central Bank will be able to meet targets with the current monetary policy strategy. It also reflects the fiscal risks, with tax cuts and increased transfers, that are likely to make disinflationary work difficult for a long period of time.
*By Alex Ribeiro — São Paulo
Source: Valor International