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With a resistant inflation that tends to burst again this year’s target, the Central Bank’s Monetary Policy Committee (Copom) this Wednesday raised the basic interest rate by 150 basis points, to 10.75% per year. The Selic has not been in double digits since July 2017, when it went to 9.25% from 10.25% per year.
“The Committee judges that this decision reflects its reference scenario for prospective inflation, a higher-than-usual variance in the balance of risks and is consistent with the convergence of inflation to its target throughout the relevant horizon for monetary policy, which includes 2022 and, to a larger degree, 2023. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing of economic fluctuations and fosters full employment”, said the Central Bank in the statement released after the meeting.
According to the committee, in spite of the more favorable public accounts data, “uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations and, therefore, the upward asymmetry in the balance of risks”
Copom signaled that from now on it will reduce the pace of monetary tightening, but reinforced that the Selic rate should advance “significantly into the restrictive territory” on the relevant horizon.
“This indication [of a reduction in the pace] reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon,” justified the committee in the decision statement. In practice, this means that the Selic is already at high levels and that it will still take some time for the effects on inflation to be noticed.
The Central Bank highlighted that the increase is compatible with the convergence of inflation to the targets over the relevant horizon, which now includes 2022 and, to a greater extent, 2023. The next meeting, in March, is the last in which the BC considers this year’s target for monetary policy decisions.
“The Committee judges that this decision reflects its reference scenario for prospective inflation, a higher-than-usual variance in the balance of risks”, the committee highlighted.
Although it indicated a deceleration in the rate of interest rate hikes, the committee highlighted the increase in its inflation forecasts and the risk of de-anchoring expectations for longer terms. In addition, he emphasized that “it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate”.
The decision was in line with the market consensus, which was for an increase of 150 basis points, as signaled by the monetary authority at the previous meeting, in December. At the time, the Selic was raised by 150bp, to 9.25% per year, and the committee said in its statement that it anticipated “another adjustment of the same magnitude” for the meeting on Wednesday.
This was the eighth consecutive hike in the basic interest rate.
In a survey carried out by Valor on Monday with 112 financial institutions and consultancies, the expectation was unanimous that the Selic rate would be raised this week by 150 bp, to 10.75% from 9.25% per year.
The interest rate shock began in March last year — when the Selic was at 2% — and has been applied to cool the economy in response to rising prices and higher expectations of rising inflation expectations for this year. The reflexes of the Selic can be seen in the financing of home ownership, government debt, productive investments and consumption.
In the anteroom of the Copom decision, the stock market and the exchange rate had a correction movement after a sequence of positive results.
Pressured by the banking sector, in which Santander’s less-good-than-expected earnings balance published by the bank, benchmark stock index Ibovespa returned to operate at the level of 112,000 points. The commercial dollar, on the other hand, surpassed R$5.30, but ended up losing strength in the last hour of trading and closed practically stable.
After adjustments, the reference index of the local stock market closed down 1.18%, at 111,894.36 points. Negative highlight of the trading session, Santander units fell 2.99%, pulling with them other shares in the segment: Itaú Unibanco shares fell 1.57%, while Bradesco common and preferential shares dropped 1.68% and 1.81%, respectively.
In the case of the exchange rate, the prospect of a higher Selic rate, which increases the differential with the outside world, weighs positively – one of the components of the attractiveness of any currency. After hitting R$5.3145 at the maximum of the day, the dollar closed at R$5.2754, a rise of only 0.09%. As a result, it remains at the lowest levels since September.
(Marcelo Osakabe, Gabriel Roca and Victor Rezende contributed to this story)
Source: Valor International