Committee hinted possibility of new hike in September
Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal
The Central Bank’s Monetary Policy Committee (Copom) raised the Selic policy interest rate by 50 basis points on Wednesday, to 13.75% per year, and hinted that it will evaluate the need for a “residual adjustment, of lower magnitude,” in its next meeting, to be held on September 20 and 21. Another novelty was the 12-month projection for inflation until the beginning of 2024, presented because of the impacts of elections on prices.
“The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” it said in a statement released after the unanimous decision. The Copom stated, however, that it “it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” Another highlight is that “the uncertainty of the current scenario, both domestic and foreign ones”, coupled with “the advanced stage of the current monetary policy cycle, and its cumulative impacts yet to be observed, require additional caution in its actions.”
According to the Copom, it was noted that inflation projections for the years of 2022 and 2023 “were heavily impacted by temporary tax measures across calendar years.”
“Therefore, the Committee decided at this moment to emphasize the projections for 12-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.”
The Copom stated that the decision to raise the Selic rate by 50 basis points, taken unanimously, reflects “the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon,” which includes 2023 and, to a lesser extent, 2024. The last time the rate was at its current level was in December 2016 and early January 2017.
“The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory,” said the Central Bank in the statement.
The monetary authority also pointed out that the external environment remains “adverse and volatile,” citing “marked downward revisions on prospective global growth in an environment of inflationary pressures.”
“The process of normalization of monetary policy in advanced economies has accelerated, affecting the prospective scenario and increasing the volatility of assets,” says the statement.
Regarding the Brazilian economic activity, the Copom wrote that the set of indicators released since the last meeting “continues to suggest that the economy grew throughout the second quarter, with the labor market recovery stronger than expected by the committee.”
“Consumer inflation remains high in volatile components and items associated with core inflation,” it stated. And concluded: “The various measures of underlying inflation are above the range compatible with meeting the inflation target.”
Copom’s inflation projections in the baseline scenario stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024, according to the Central Bank. For regulated prices, inflation projections are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024.
“The projections based on the reference scenario incorporate the tax measures recently approved,” highlighted the Copom in the statement. “For the six-quarter-ahead horizon, which mitigates the calendar-year impact but incorporates the second-round effects of the tax measures that occur in 2022 and the first quarter of 2023, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.”
*By Estevão Taiar, Guilherme Pimenta — Brasília
Source: Valor International