It’s the first cut since August 5, 2020, when it lowered rate to 2% from 2.25%. The vote was 5 to 4
Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo
After months of pressure from the government, Central Bank’s Monetary Policy Committee (Copom) decided on Wednesday to cut the key interest rate Selic by 50 basis points, to 13.25% per year. It’s the first cut since August 5, 2020, when the monetary authority reduced the rate to 2% from 2.25%. The vote was 5 to 4. The policymakers also predicted another 50 bp cut at the next meeting in September, “if the scenario evolves as expected.”
Voting for a 50 bp cut were Roberto Campos Neto, Ailton de Aquino Santos, Carolina de Assis Barros, Gabriel Muricca Galípolo, and Otávio Ribeiro Damaso. Four others wanted a 25 bp cut: Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, and Renato Dias de Brito Gomes.
The Selic rate has been stuck at 13.75% per year for 12 months after the most aggressive tightening cycle since the creation of the inflation targeting regime in 1999. From March 2021 to last August, the monetary authority raised rates by 11.75 percentage points.
The committee assesses that the improvement in the inflation picture and expectations has allowed it to build confidence to begin a gradual monetary easing cycle.
“The committee judges that the improvement on the inflation scenario, reflecting in part the lagged effects of monetary policy, coupled with the reduction of longer-term inflation expectations, after the recent decision of the National Monetary Council on the inflation target, have given the necessary confidence to start a gradual cycle of monetary policy easing,” the Copom said in a statement after the meeting.
Better inflation picture
The committee analyzed the alternative of reducing the key rate by 25 bp, “but concluded that it was appropriate to adopt a 50 bp pace in this meeting due to an improvement in the inflation dynamics, reinforcing however the firm objective of keeping a contractionary monetary policy to reanchor expectations and bring inflation to the target in the relevant horizon.”
According to the statement, “the total magnitude of the easing cycle throughout time will depend on the inflation dynamics, especially the components that are more sensitive to monetary policy and economic activity, on inflation expectations, in particular the longer-term ones, on its inflation projections, on the output gap, and on the balance of risks.”
The decision came above the median of market expectations, although bets for a more hawkish cut have increased in recent weeks – in a survey conducted by Valor with 128 financial and consulting firms, 82 analysts (64.6%) forecast a 25 bp cut in the Selic and 44 (36.4%) expected a 50 bp cut.
This is the Copom’s first meeting with the participation of the directors appointed by President Luiz Inácio Lula da Silva, Gabriel Galípolo (monetary policy) and Ailton Aquino (oversight).
The latest inflation data showed a more favorable scenario for monetary policy. Brazil’s official inflation index IPCA fell by 0.08% in June, according to the Brazilian Institute of Geography and Statistics (IBGE).
The 12-month inflation was 3.16%, close to the middle of the target range of 3.25%, with a margin of plus or minus 1.5 percentage points. For the following years, the National Monetary Council (CMN) has set the target at 3% with the same range. However, inflation is expected to accelerate again by the end of the year.
In addition to the decline in the headline inflation, the average of five core rates, which strips out volatile items, fell to 5.99% in June from 6.72% in May. These indicators are closely monitored by the committee and remain above target.
The inflation forecasts in the Focus bulletin, Central Bank’s weekly survey with analysts, have also been revised downwards in recent weeks. For this year, analysts expect a rise of 4.84%, compared with 4.98% four weeks ago, and 3.89% for 2024, compared with 3.92%. The forecast for 2025 and 2026 is 3.5%.
At the June meeting, the Central Bank did not clearly signal in the statement that it would cut interest rates in August, but softened the tone and made it explicit in the minutes of the meeting released a week later that there was divergences among policymakers on the indication of future steps.
A minority was more cautious and preferred to wait, while the majority thought that “the continuation of the ongoing disinflationary process, with the consequent impact on expectations” have given “the necessary confidence to start a gradual cycle of monetary policy easing” at the August meeting.
The Copom will meet again on September 19 and 20.
*Por Larissa Garcia, Alex Ribeiro — Brasília, São Paulo
Source: Valor International