Monetary Policy Committee remains non-committal on future rate decisions

06/20/2024

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Roberto Campos Neto — Foto: Fabio Rodrigues-Pozzebom/Agência Brasil

In a unanimous decision, following criticism from President Lula, the Monetary Policy Committee (COPOM) paused its recent series of interest rate cuts and maintained the Selic rate (Brazil’s benchmark interest rate) at 10.5% per annum. This decision, halting the reduction sequence that began in August 2023 when the rate was 13.75%, was influenced by deteriorating inflation forecasts and diminishing market expectations.

The decision emerged a day after President Lula leveled fresh criticism at Central Bank President Roberto Campos Neto, accusing him of being “politically biased” and asserting that Mr. Campos Neto’s conduct was the only “thing out of place” in the country.

In their statement, the board highlighted that the current global uncertainties, combined with a domestic environment “characterized by persistent economic activities, escalating inflation projections, and unanchored expectations,” necessitated a more cautious approach.

The committee refrained from making specific commitments regarding the future trajectory of the Selic rate, emphasizing its vigilant stance and asserting that “any future adjustments” will be guided by “a firm commitment to converging inflation to the target.” It also highlighted that monetary policy should remain contractionary “for a sufficient period at a level that consolidates both the disinflation process and the anchoring of expectations around their targets.”

Recent data from the Focus report indicates a worrying trend in inflation expectations; for 2024, the projection has risen to 3.96% after six consecutive increases, and for 2025, it stands at 3.80% following seven weeks of continuous rises. Since the last COPOM meeting, Mr. Campos Neto and Gabriel Galípolo, the director of monetary policy, have both voiced their concerns over the escalating inflation expectations in public addresses.

In light of these developments, the COPOM emphasized the need for “serenity and moderation in the conduct of monetary policy.” The current economic climate is described as one where disinflation is “expected to be slower,” there is a “widening of the unanchoring of inflation expectations,” and the global scenario remains “challenging.”

The decision to maintain the Selic rate aligned with market expectations. A survey conducted by Valor, which included 132 financial institutions, revealed that only nine believed there was room for a 25-basis-point reduction, while the majority anticipated that the rate would remain unchanged.

Market observers also paid close attention to the voting dynamics within the committee following a split decision in May. At that time, Mr. Campos Neto, Carolina de Assis Barros, Diogo Guillen, Otávio Damaso, and Renato Gomes voted in favor of reducing the rate by 25 basis points. Conversely, directors appointed by the current administration, Ailton Santos, Gabriel Galípolo, Paulo Picchetti, and Rodrigo Teixeira, voted for a more substantial cut of 50 basis points.

Another point of interest was the ongoing debate on the balance of risks for inflation, which maintained factors pulling in both directions. In the minutes from the May meeting, it was noted that some members of the committee saw “merit” in discussing an asymmetrical balance of risks skewed upwards, suggesting that upward pressures on inflation were deemed more significant than downward influences.

In Wednesday’s announcement, the balance of risks was again described as symmetrical, with ongoing global inflationary pressures and persistent inflation in the services sector due to a tighter output gap—indicative of less economic idleness—highlighted as upward pressures. Conversely, the COPOM noted potential downward risks, including a pronounced slowdown in global economic activity and a more significant impact from synchronized monetary tightening on global inflation.

The COPOM outlined two scenarios for its inflation forecasts. Under the reference scenario, which assumes the Focus interest rate trajectory and an exchange rate starting at $5.30 per dollar based on purchasing power parity, inflation is projected at 4% for 2024 and 3.4% for 2025. This is a slight increase from May’s projections of 3.8% for this year and 3.3% for next year. For monitored prices, the projection was adjusted from 4.8% down to 4.4% in 2024, while the estimate for 2025 remains steady at 4%.

In the alternative scenario, where the Selic rate remains unchanged throughout the relevant period extending into 2025, the projections are 4% for 2024 and 3.1% for 2025, against a target of 3% for both years.

*Por Gabriel Shinohara, Alex Ribeiro — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/