Bruno Serra — Foto: Carol Carquejeiro/Valor

The speech of the Central Bank’s monetary policy director, Bruno Serra Fernandes, in an event held by Goldman Sachs on Monday morning greatly reduces the chances of Brazil’s benchmark interest rate Selic being raised beyond 13.25% per year.

He classified the extension of the cycle of interest rate hikes in the next meeting, in June, as likely, but not certain. He also acknowledged that he is considering two options to contain the inflation surge: raise interest rates further or postpone the Selic cuts planned for next year.

In another sign of little willingness to go beyond 13.25% a year, he said that the Central Bank considers the sacrifice ratio, or the price paid in terms of economic activity to disinflate the economy faster – although he highlighted that the fight against inflation weighs more.

Finally, he defended the inflation projection for 2023, the main guide for the size of the monetary tightening cycle, which stands at 3.4% and is well below the estimates of 4.1% by private-sector analysts at this month’s meeting of the Central Bank’s Monetary Policy Committee (Copom).

Financial market analysts are divided about the signals given by the Copom in the last meeting. Some believe that the Central Bank signaled that it will raise interest rates to 13.25% per year from 12.75% and stop the cycle at that level. Others think that policymakers did not commit to anything and that it will continue to raise interest rates.

Apparently, the signaling is at the halfway point. The economic backdrop of the meeting in May supports a likely extension of the rate hike cycle beyond the previous final rate of 12.75% in June. But, as always, the signals are conditional and will depend on the evolution of the economy by the meeting in June.

Mr. Serra’s speech on Monday, however, brings more elements about the Central Bank’s own signaling and about how high the requirements for a possible extension of the cycle are.

A key point is that Mr. Serra made a point of highlighting that the Central Bank has signaled a probable extension of the cycle. This is what the Copom wrote in its statement and in the minutes of the last meeting, but some analysts understood that the monetary authority was probably not referring to the extension of the cycle, but to a minor raise.

In other words, what the Copom has signaled, without confirming, is the possibility of an extension of the cycle. Mr. Serra emphasized, in the event, all the uncertainties surrounding the inflation projections and also the cautious tone adopted by the Central Bank.

Surely the most important part of Mr. Serra’s speech was the indication that the Copom is evaluating two alternatives to reach the inflation target: raise interest rates to a higher peak, or postpone the downward cycle expected for next year.

In other words, even if, due to the circumstances of the scenario, the Central Bank concludes that it will have to increase interest rates even higher, it is not certain that the alternative will be to keep on increasing them. The additional tightening may come through a postponement of the interest rate cut.

When answering one question, Mr. Serra got mixed up and mentioned that the Central Bank could potentially postpone the meeting of the inflation target after 2023. He corrected himself soon after. He was actually referring to a postponement of the cycle of cuts.

Strictly speaking, there was no mistake: if the option is to postpone the interest rate cut scheduled for 2023, instead of raising it now, in fact, the Central Bank will be displacing its target to 2024, given how long it takes for monetary policy to reach price indexes.

Mr. Serra had said in a live-streamed speech earlier this year that there was little room to fight inflation in 2023 by postponing interest rate cuts. Today, this space is much smaller.

Mr. Serra also discussed the sacrifice ratio of monetary policy. This is a topic slightly different from the concern with activity cited in the balance of risks of the last meeting of the Copom. On that occasion, he referred to the downside risk to inflation of an eventual negative surprise in economic activity. This time, he spoke directly about the price in terms of activity paid to disinflate the economy.

In his considerations, Mr. Serra said that the choice of the Central Bank today should lean more towards inflation because society demands this at the present moment around the world. But the director also put on the agenda the concern with the activity, which emerges as a secondary objective in the monetary authority’s mandate.

Finally, Mr. Serra defended, in a way, Central Bank’s inflation projections. This had already been done in the Copom minutes released last week. He cited several factors that explain why Copom’s projections are below market projections.

This is important because, if the Central Bank was revising its methodology to get closer to the market consensus, it would find a higher inflation projection. Again, this would require a higher interest rate dose. It must be remembered that the Copom has taken the upside asymmetry out of its inflation projections, within its balance of risks.

Overall, Mr. Serra’s remarks were in the direction of not raising interest rates beyond 13.25%, although he didn’t close the door on it, citing the conditional nature of the monetary policy signals.

Mr. Serra is seen as part of the “dovish” wing of the Copom, formed by directors less inclined to raise interest rates. It’s necessary to follow what other members of the Copom will say from now on to gauge the direction of monetary policy.

Source: Valor International

https://valorinternational.globo.com