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Central Bank raises interest rate by 100 bp, to 12.75%

Policymakers also affirmed that the future steps of the monetary policy may be adjusted to ensure the convergence of inflation to its targets — Foto: Beto Nociti/BCB
Policymakers also affirmed that the future steps of the monetary policy may be adjusted to ensure the convergence of inflation to its targets — Foto: Beto Nociti/BCB

The Central Bank’s Monetary Policy Committee (Copom) raised the policy interest Selic rate by 100 basis points and signaled an extension of the monetary tightening cycle for its next meeting. “For its next meeting, the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude,” the Central Bank said in a note. The Copom raised the benchmark interest rate to 12.75% a year from 11.75%.

According to the document, the committee notes that “heightened uncertainty of the current scenario, the advanced stage of the current monetary policy cycle, and its impacts yet to be observed require additional caution in its actions.”

The policymakers also affirmed that the future steps of the monetary policy may be adjusted to ensure the convergence of inflation to its targets “and will depend on the evolution of economic activity, the balance of risks and inflation expectations and projections for the relevant horizon of monetary policy.”

In its decision, Copom maintained its assessment that risks exist in both directions for inflation and highlighted the persistence of global inflationary pressures and uncertainty regarding the future of the country’s fiscal framework among the factors that would push prices upwards.

On the other hand, a possible reversal, even if only partial, of the increase in commodity prices in reais and a sharper-than-projected slowdown in economic activity could impact the price index in the opposite direction.

In the March meeting, the Central Bank had outlined two scenarios for oil. Wednesday, the monetary authority opted for keeping the alternative scenario as the main one — in it, the barrel ends this year at $100 and increases 2% a year starting in January 2023.

The Copom also evaluated that the external environment continued to deteriorate. “Inflationary pressures arising from the pandemic period have intensified due to supply problems related to the new wave of Covid-19 in China and the war in Ukraine. The repricing of monetary policy in advanced countries increases uncertainty and generates additional volatility, particularly in emerging countries,” it said. In relation to the Brazilian economic activity, the monetary authority stated that growth is in line with what was expected.

The Copom reiterated that consumer inflation continued to surprise negatively. “These surprises occurred both in the more volatile components and on the items associated with core inflation,” it pointed out.

Read the English version of Copom’s full statement distributed by the Central Bank:

In its 246th meeting, the Copom unanimously decided to increase the Selic rate to 12.75% p.a.

The following observations provide an update of the Copom’s scenario:

The global environment has deteriorated further. Inflationary pressures arising from the pandemic period have intensified due to supply problems related to the new wave of Covid-19 in China and the war in Ukraine. The repricing of monetary policy in advanced countries increases uncertainty and generates additional volatility, particularly in emerging economies;

Turning to the Brazilian economy, the set of indicators released since the previous Copom meeting suggests a rate of growth in line with the Committee’s expectations;

Consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and on the items associated with core inflation;

The various measures of underlying inflation are above the range compatible with meeting the inflation target;

Inflation expectations for 2022 and 2023 collected by the Focus survey are around 7.9%, and 4.1%, respectively; and

In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 4.95* and evolves according to the purchasing power parity (PPP). The Committee decided to keep the assumption that oil prices follow approximately the futures market curve until the end of 2022, ending the year at USD 100/barrel, and then start increasing 2% per year in January 2023. The energy flag is assumed to be “yellow” in December of 2022 and 2023. In this scenario, Copom’s inflation projections stand at 7.3% for 2022 and 3.4% for 2023. Inflation projections for administered prices are 6.4% for 2022 and 5.7% for 2023. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.

The Committee emphasizes that risks to its scenarios remain in both directions. Among the upside risks for the inflationary scenario and inflation expectations, it should be emphasized (i) a greater persistence of global inflationary pressures; and (ii) an increase in the risk premium due to the uncertainty about the country’s future fiscal framework, partially incorporated in inflation expectations and asset prices. Among the downside risks, it should be noted (i) a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency; and (ii) a greater deceleration of economic activity than projected. The Committee assesses that the uncertain and volatile current scenario requires serenity when evaluating the risks.

Taking into account the assessed scenarios, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 1.00 p.p. to 12.75% p.a. The Committee judges that this decision 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 convergence of inflation to its target throughout the relevant horizon for monetary policy, which includes 2023. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

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. The Committee emphasizes that it will persist in its strategy until the disinflation process consolidates and anchors expectations around its targets.

For its next meeting, the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude. The Committee stresses that the heightened uncertainty of the current scenario, the advanced stage of the current monetary policy cycle, and its impacts yet to be observed require additional caution in its actions. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, the balance of risks, and inflation expectations and projections for the relevant horizon for monetary policy.

The following members of the Committee voted for this decision: Roberto de Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.

*Value obtained according to the usual procedure of rounding the average USD/BRL exchange rate observed on the five business days ending on the last day of the week before the Copom meeting.

Note: This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.

Source: Valor International

https://valorinternational.globo.com

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Benchmark interest rate to be still high after May

Transition of Interest Rate Benchmarks | OCBC Singapore

The March inflation numbers, which came in well above consensus expectations, once again increased the market’s distrust that the Central Bank will be able to meet its goal of ending the cycle of interest rate hikes at the next Monetary Policy Committee (Copom) meeting in May.

The skepticism of financial agents was reflected in the increase in bets that the end-of-cycle interest rate will be higher than the Central Bank had signaled in its last monetary policy meeting, 12.75%. The negative surprise with benchmark inflation index IPCA pushed future rates to price the Selic policy interest rate around 13.25% for the end of 2022.

“In terms of monetary policy, today’s [Friday’s] result strengthens our scenario that the Central Bank will need to revise its inflation projections of 6.3% for 2022 and 3.1% for 2023, and then revise its baseline scenario for monetary policy to interrupt the tightening cycle in May. We maintain our bet that the Central Bank will increase the benchmark interest rate by 100 basis points in May, 75 basis points in June and 50 basis points in August, to 14%,” Credit Suisse professionals wrote in a report.

There are also scenarios of even higher interest rates in Brazil. According to investment bank Haitong’s chief economist for Brazil and professor at the Getúlio Vargas Foundation, Marcos Ross, the widespread price hikes may force the Copom to raise the interest rate beyond 14%.

“Thinking about the balance of risks, there is no way to think that the Central Bank will be comfortable with this data, it is a number that will have an impact on expectations. I believe that reality will impose itself and the Copom will not stop tightening in May,” he says.

After the release of the index, Haitong revised its IPCA estimate for 2022 to 7.4% from 6.8%, and for 2023, to 4.1% from 3.7%. The basic scenario of the bank for the Selic is that the Central Bank should opt, in the end, for making a gradual end of cycle — the monetary authority had been signaling its intention to close the interest rate hike in the next Copom meeting, in May. “We see another 100 basis points hike and a reduction in the pace, from 75 basis points and 50 basis points in August”, says Mr. Ross, citing the bank’s projection of a Selic rate at the end of the cycle of 14%.

In an alternative scenario, Haitong predicts that the lower doses of tightening planned for June and August may increase, in the face of current pressured and widespread inflation. “The risk is, instead of another 75 basis points hike, there will be another 100 basis points hike, and 50 basis points of hike will turn into 75 basis points,” he says. “So I imagine, in an alternative scenario, that the Selic could exceed 14%.”

At Bank of America, the data generated a revision of year-end inflation expectations to 8.0% in 2022 and 4.5% in 2023. “All in all, this corroborates our view that the Central Bank will not be able to interrupt the tightening cycle in May. We expect a final 50 basis points hike in June, raising the Selic to 13.25%, but the risks are up,” write professionals with BofA, in a report signed by the head of economics for Brazil and Latin America strategy, David Beker.

Source: Valor International

https://valorinternational.globo.com

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Analysis: Market sees 12.75% as floor for interest rate

Many economists are questioning technical basis and rhetoric behind Central Bank's decision — Foto: Raphael Ribeiro/BC
Many economists are questioning technical basis and rhetoric behind Central Bank’s decision — Foto: Raphael Ribeiro/BC

Economic analysts, in general, understood that the Central Bank’s Monetary Policy Committee (Copom) signaled a rate of 12.75% per year at the end of the current interest rate tightening cycle. Yet many still see this level as the floor for the Selic, Brazil’s benchmark interest rate.

Economists and traders told Valor that the end-of-cycle signal, this time, was weaker and subject to revisions since the committee linked the future path of interest rates to the evolution of oil prices.

Others say that, even considering that the Central Bank’s intention is to stop at 12.75% per year, the inflationary scenario will remain challenging and, as a result, force the Copom to do more.

Others say that the cycle is unlikely to end up at 12.75% because, in that case, the committee will make one last sharp move in interest rates, 100 basis points. The Central Bank typically ends tightening cycles more smoothly.

There are still concerns, in part of the market, of an exaggeration in monetary policy. But even those who believe that the Central Bank has gone too far on interest rates consider it unlikely that it will deliver a rate lower than 12.75% per year. Wednesday, interest rates rose to 11.75% per year, and the Copom explicitly signaled a new 100 bp increase, which would take the Selic to 12.75%.

BGC Liquidez presents a look at the market mood shortly after the Copom’s decision in a survey of 162 economists and traders, distributed to its clients on Thursday.

Only 16% of respondents think that the Central Bank will stop at 12.75%. The most common bet, of 42% of those who took part in the survey, is that the interest rate will rise to 13.25%. On the eve of the Copom meeting, in another survey by the BGC, with 207 participants, only 26% mentioned this percentage. End-of-cycle bets of 13%, meanwhile, shrank to 6% from 27%.

This is, however, a snapshot of the moment, and many economic analysts want to wait longer for an eventual change in their bets for the Selic rate at the end of the cycle. They say the language of the Central Bank usually changes a lot between the release of the Copom statement and the minutes. Next week, the monetary authority will also release the Inflation Report, with a press conference.

Many economists are questioning, after the Copom meeting, the technical basis and rhetoric behind the decision, so they are waiting for the Central Bank to better explain what was discussed in it.

A question mark is the fact that the committee presented projections for the price index in an alternative scenario, incorporating a good part of the oil price drop that occurred until Wednesday, to show that inflation reaches the target in 2023 without a dose of interest rate higher than 12.75% per year.

Some in the market are skeptical about that, so much so that the projections for the Selic rate have risen. There was already a questioning of the monetary authority’s calculations due to the fact that the Copom’s inflation projections are below market estimates, of 3.7%.

Another point that bothers many economists is the change in the way the Copom analyzes the balance of risks. The committee basically said that the chances of inflation exceeding expectations were lower because much of the fiscal fears had already materialized in market expectations and in the foreign exchange rate.

For some, the Copom swept some fiscal uncertainty under the carpet to avoid having an inflation forecast adjusted by the balance of risks that requires an interest rate higher than 12.75% per year.

But this may just be a concern of economists, who have a more technical view of the Copom’s decision-making process. But market operators consulted by Valor on Thursday were more comfortable with the communication, despite the large number of people who think that the interest rate will have to go over 12.75% per year.

The survey by BGC Liquidez shows a divergence in the reading of the Copom statement between economists and traders. Among economists, 69% thought the message was “dovish,” or less inclined to tightening. Among traders, this percentage is 35%.

Source: Valor International

https://valorinternational.globo.com

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Central Bank raises interest rate, signals new hike

For the next meeting, the Copom foresees another adjustment of the same magnitude — Foto: Jorge William/Agência O Globo
For the next meeting, the Copom foresees another adjustment of the same magnitude — Foto: Jorge William/Agência O Globo

The Central Bank’s Monetary Policy Committee (Copom) raised on Wednesday the Selic, Brazil’s benchmark interest rate, by 100 basis points, to 11.75% per year. This is the ninth consecutive increase. For the next meeting, the Copom foresees another adjustment of the same magnitude.

“The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy,” says the committee’s statement.

This Wednesday’s decision was in line with the median of market expectations and within what was signaled by the monetary authority at the previous meeting – at the February meeting, the Central Bank indicated it would reduce the pace of monetary tightening, but did not specify the magnitude of the next adjustments. At the time, the Selic was raised by 150 bp, to 10.75% per year

In a survey carried out by Valor with 93 financial and consultancy firms, 82 expected the Selic to be raised by 100 bp, to 11.75%. Nine projected a 125 bp increase, while two believed the committee would keep the pace of interest rate hikes at 150 bp.

The Copom meets again on May 3 and 4.

For the Copom, in the external scenario, the environment has deteriorated substantially. “The conflict between Russia and Ukraine has led to a strong tightening in financial conditions and higher uncertainty surrounding the global economic outlook”, it stated. “In particular, the supply shock resulting from the conflict has the potential of increasing inflationary pressures, which had already been rising both in emerging and advanced economies.”

The committee says that it considers it appropriate for interest rates to advance significantly towards an even more contractionary terrain and “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 an even more restrictive territory.”

The Copom stated that “consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and on the items associated with core inflation.”

In the statement, the Central Bank stressed that various measures of underlying inflation are above the range compatible with meeting the inflation target.

Regarding Brazilian economic activity, the Copom highlighted that the release of the GDP figures for the fourth quarter of 2021 indicated a higher-than-expected pace of activity.

The committee states that “the current projections indicate that the interest rate cycle in its scenarios is sufficient for inflation convergence to levels around the target over the relevant horizon.”

The Copom published two inflation projection scenarios, both considering a rise in basic interest rates to 12.75% per year, with a fall to 8.75% per year next year.

“The committee’s actions aim at curbing the second-round effects of the current supply shock in several commodities, which appear in inflation in a lagged manner”, it stated. “The Copom judges that the moment requires serenity to assess the size and duration of the current shocks.”

“If those shocks prove to be more persistent or larger than anticipated, the Committee will be ready to adjust the size of the monetary tightening cycle. The committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate,” the statement continues.

“The Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations, but considers that this risk is being partially incorporated in the inflation expectations and asset prices used in its models. The Committee maintains the assessment of an upward asymmetry in the balance of risks.

The committee still sees both upside and downside risks to inflation.

“On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in its scenarios,” says the document.

“On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country’s risk premium.”

Source: Valor International

https://valorinternational.globo.com

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Analysis: Survey suggests neutral interest rate hike above 4%

US Federal Reserve with the third interest rate hike this year

The Focus bulletin of financial market expectations, released on Monday, indicates that neutral interest rate estimates are on the rise, above 4% a year. This trend, if confirmed, means that the Central Bank will have to define a higher Selic, Brazil’s benchmark interest rate, in the coming years to keep inflation in check.

The market increased, for the second week in a row, its estimate for the nominal interest rate in 2024, to 7.38% a year from 7.25% a year. This means a real interest rate of about 4.38%, considering the 3% inflation target set by the government for the long term.

This percentage exceeds the estimate of a neutral interest rate of 4% a year given by the market in a survey answered by private-sector analysts in December, on the eve of the meetings of the Central Bank’s Monetary Policy Committee (Copom).

The Central Bank itself estimates a neutral interest rate of 3.5% a year, as disclosed in the Inflation Report last month. But the monetary authority assigns a relatively high probability that the percentage will be higher than that, since it considers that fiscal fragility increases the risk of a higher neutral rate.

The year 2024 is far enough away to leave the most immediate horizon of monetary policy, so the interest rate estimated by the market for the period is a kind of approximation of the economy’s neutral rate.

Today, the Central Bank’s attention is focused on meeting the inflation target mainly for 2023 and, to a lesser extent, 2022. The real interest rate that will be in effect in 2024 will be focused on guaranteeing the fulfillment of the inflation target in 2025.

The increase in the projection for the interest rate in 2024 may reflect, besides an eventual increase in the neutral interest rate, a market view that the fight against inflation may be longer than expected, amid a greater resistance in the rise of global prices.

A sign of these difficulties is that the inflation projection for 2024 also rose for the second week in a row, to 3.09% from 3.04%. The rise, however, is smaller than the advance in nominal interest rates in the period, which reinforces the view that the rise in neutral interest rates may be behind the revision of the outlook for the Selic in the period.

The median projection for the Selic rate for the following years remains at 7% per year. But there are previous signs that it may be on an upward trajectory. The average of the projections for 2025 rose to 7.17% from 7.1%. In the case of projections for 2026, it rose to 7.07% from 6.9%.

It is difficult to determine exactly what is causing the higher estimates for the neutral interest rate. Judging by the December survey, two factors may be playing a role: the increase in fiscal risk and the more challenging international scenario.

This year, the government has once again considered new measures that weaken the fiscal situation, such as tax cuts for fuels and for the industrial sector, in a period in which the government still faces a fiscal deficit. The prospect of interest rates being raised by developed countries also creates uncertainty about the level of interest rates that will prevail worldwide in the long term.

Source: Valor International

https://valorinternational.globo.com

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