Citing an adverse scenario, the Monetary Policy Committee unanimously raised the Selic policy rate to 12.25%
12/12/2024
The Monetary Policy Committee (COPOM) accelerated its tightening pace, raising the benchmark Selic rate from 11.25% to 12.25%. Citing a more adverse and less uncertain scenario, the committee also signaled two additional hikes of 100 basis points each for the upcoming meetings, “contingent on the expected scenario being confirmed.”
With this guidance, the newly configured COPOM in 2025, chaired by Gabriel Galípolo and with seven of its nine seats occupied by appointees of the current government, could raise the Selic rate to 14.25% by March. This level would be the highest since August 2016. Wednesday’s decision was unanimous.
The COPOM said the total magnitude of the tightening cycle will depend on its “firm commitment” to anchoring inflation to the target and “will depend on the evolution of inflation dynamics.” The continuous inflation target from 2025 onwards is 3% per year, with a tolerance band of 150 basis points in either direction.
The committee cited factors influencing the cycle’s magnitude, including the evolution of inflation components most sensitive to economic activity and monetary policy. Additionally, the statement highlighted inflation projections, inflation expectations, economic slack (the output gap), and the balance of risks—factors that could lead inflation to deviate from the Central Bank’s forecasts.
On economic activity, the COPOM noted the ongoing “dynamism” in the labor market. It pointed out that the 0.9% GDP growth in the third quarter indicated a further narrowing of the output gap. A positive output gap, already a factor in previous meetings, suggests that economic activity is above potential, potentially fueling inflation.
The committee also emphasized that there has been additional de-anchoring of inflation expectations and upward revisions to its projections. The COPOM now forecasts the IPCA inflation index at 4.9% in 2024, 4.5% in 2025, and 4% in the second quarter of 2026. Meanwhile, the Central Bank’s Focus survey, which aggregates market expectations, shows a median inflation forecast of 4.84% for this year, 4.59% for 2025, and 4% for 2026. The second quarter of 2026 is currently the relevant horizon for monetary policy.
The combination of de-anchored expectations, stronger-than-expected activity, and a wider output gap requires “an even more contractionary monetary policy,” according to the COPOM. Regarding the balance of risks, the committee noted that risks have materialized, and the scenario is now “less uncertain and more adverse” than in the previous meeting in November. It also highlighted a persistent upward bias in the balance of risks.
The Central Bank assessed that market reactions to the government’s fiscal measures significantly impacted asset prices and expectations, particularly regarding risk premiums, inflation expectations, and the exchange rate. These factors, the committee argued, contribute to “a more adverse inflationary dynamic.”
In late November, the government announced fiscal adjustment measures expected to have a R$70 billion impact over the next two years. After the measures were disclosed, the exchange rate per U.S. dollar breached the R$6 level. On Monday, however, the U.S. currency closed at R$5.9682.
LCA Consultores noted that the tone of the COPOM statement was the most conservative since 2016, according to an index developed by the firm. “It was the most ‘hawkish’ statement since communications reached a minimum number of sentences for analysis,” said economist Bruno Imaizumi from LCA. “This is consistent with the surprising 300 basis points already in the pipeline. It aims to fully dispel the doubts that the COPOM itself created in May.”
Mr. Imaizumi referred to the May decision, when the committee was split. Four members appointed by the current government voted for a sharper rate cut, while the other five, already on the Central Bank’s board, favored a smaller 25-basis-point cut.
When asked about the COPOM’s decision, Finance Minister Fernando Haddad said it was surprising on one hand but “had already been priced in” on the other. He added that he would review the statement and consult with others after the quiet period.
(Victor Rezende contributed reporting.)
*By Gabriel Sinohara e Alex Ribeiro
Source: Valor International