Policy interest rate was cut by 25 bp; decision was made by 5 to 4 in the collegiate meeting

09/05/2024

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Central Bank’s building in Brasília — Foto: Beto Nociti/BCB

In a decision that divided its members, the Central Bank’s Monetary Policy Committee (COPOM) on Wednesday reduced the policy interest rate, known as Selic, to 10.50% per year from 10.75% per year. The 25-basis-point cut was supported by five members of the committee, while the other four voted to continue the 50 bp reduction, as in the last six meetings.

This division has sparked adverse reactions among market agents, who are concerned about a potentially more inflation-tolerant board after Central Bank President Roberto Campos Neto’s term ends this year.

The board consists of the Central Bank president and eight directors. Mr. Campos Neto and directors Carolina de Assis Barros, Diogo Guillen, Otávio Damaso, and Renato Dias de Brito Gomes supported the 25-bp cut. In contrast, Ailton de Aquino Santos, Gabriel Galípolo, Paulo Picchetti, and Rodrigo Teixeira, all appointed by President Lula, voted for a 50-bp reduction.

A Valor survey had predicted this outcome, with 78 of the 118 financial institutions and consultancies expecting a 25-bp cut and another 40 anticipating a 50-bp reduction.

The last split in the committee over interest rate cuts occurred at the start of the current cut cycle in August 2023. At that time, the decision to reduce the rate to 13.25% per year from 13.75% per year garnered five votes—those of Mr. Campos Neto, Mr. Aquino, Mr. Barros, Mr. Galípolo, and Mr. Damaso. Directors Fernanda Guardado, Maurício Moura, Guillen, and Gomes had voted for a 25-bp reduction.

A significant development in Wednesday’s statement was the absence of clear guidance on the next steps for the Selic rate. Historically, the COPOM has indicated reductions of 50-bp cuts in “upcoming meetings.” This pattern shifted at the March meeting when the guidance was narrowed to a 50-bp cut at only the “next meeting” amid heightened uncertainty. Since then, the landscape has grown even murkier, and such a cut has not materialized.

Contributing to this uncertainty were doubts about the direction of interest rates in the United States and the Brazilian government’s revision of the fiscal target for 2025 from a surplus of 0.5% of GDP to a zero deficit. In this context, Mr. Campos Neto outlined four potential scenarios for monetary policy. The first scenario would see a reduction in uncertainty, taking “the usual path.” The second would occur if high uncertainty persisted without significant changes, potentially leading to “a reduction in pace.” In the third scenario, increasing uncertainty would strongly impact key variables, necessitating a discussion on adjusting the risk balance. In the worst case, escalating uncertainty would cause global stress, prompting the Central Bank to alter its baseline scenario.

In its latest statement, the COPOM noted that the external environment “appears to be more adverse.” In March, the situation was described as “volatile.” The increased adversity is attributed to significant uncertainty about when the United States will begin monetary easing and “the speed at which a sustained decline in inflation will be observed in several countries.”

Regarding the domestic situation, the statement indicated that economic activity and labor market indicators “have been more dynamic than expected.” In March, the COPOM had described these indicators as consistent “with the economic slowdown scenario anticipated by the COPOM.”

On fiscal matters, the COPOM has been closely monitoring “recent developments in fiscal policy and their impact on monetary policy,” emphasizing that a credible fiscal policy “committed to debt sustainability helps anchor inflation expectations and reduce financial asset risk premiums, consequently affecting monetary policy.” Before the fiscal targets were revised, the committee had underscored “the importance of the firm pursuit of these targets.”

The statement also emphasized that the board “unanimously” agreed that the uncertain global scenario and the domestic environment, marked by resilience in activity and unanchored expectations, “call for greater caution.”

The COPOM’s inflation projections have increased, with expectations of 3.8% this year and 3.3% in 2025. In March, inflation was projected at 3.5% for 2024 and 3.2% for 2025.

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

Source: Valor International

https://valorinternational.globo.com/