Brazil's Finance Minister Fernando Haddad found the Monetary Policy Committee (Copom)'s decision to leave the basic Selic interest rate unchanged at 13.75% per year very worrisome, particularly because new increases were not ruled out for the near future, Agencia Brasil reported.
At a time when the economy is shrinking, Copom is signaling a rise in interest rates. We read it very carefully, but we think that the communiqué is really quite worrisome, Haddad told reporters. He also said he was surprised with the Central Bank (BCB) statement, on a day when the government released new estimates that indicate an increase in revenues and a reduction in the primary deficit in relation to the figure sanctioned in the Budget.
For Haddad, the release of the report demonstrates the government's commitment to rebalancing the public accounts. According to him, this would be a reason for the Central Bank to start easing monetary policy, instead of hardening the tone in the communiqué.
I considered the statement worrying, very worrying, because today we released the bimonthly report showing that our January projections are being confirmed on public accounts, commented Haddad.
The minister said that he will pass on the findings about the tone of the Copom statement in the next institutional meetings with the president of the Central Bank, Roberto Campos Neto. Despite his disagreements with the monetary authority, Haddad said that the relationship between the Finance Ministry and the Central Bank should be one of harmony and that it will continue to be guided by institutionality.
I have talked about harmony since the first interview and I will continue to persevere with this objective, Haddad insisted. The Central Bank has a mandate; the law is clear about the objectives of the Central Bank, he added as he feared a high interest rate would slow down credit. ”We should still send a set of measures to the Casa Civil (Chief of Staff Office) in April to improve the credit environment,” Haddad explained.
In a communiqué, Copom said that the international environment has deteriorated since its last meeting, with banks in trouble in the United States and Europe and inflation in most countries failing to ease. In the domestic economy, the slowdown continues, with inflation above the target ceiling.
According to Haddad, Brazil is in a different situation from the main international economies, which does not justify an increase in the Selic rate at this moment, even with the US Federal Reserve having raised the basic interest rate by 0.25 percentage points on Wednesday.
The current Selic rate remains the highest since January 2017, when it was also at 13.75% per year. This was the fifth time in a row that the Central Bank did not change the rate, which has remained at this level since August last year. Previously, Copom had raised the Selic for 12 consecutive times, in a cycle that began amid rising food, energy, and fuel prices.
From March to June 2021, Copom raised the rate by 0.75 percentage points in each meeting. In early August of the same year, the Central Bank started to increase the Selic rate by one point at each meeting. With inflation rising and the worsening of tensions in the financial market, the Selic was increased by 1.5 percentage points from October 2021 to February 2022. Last year, Copom promoted two 1-point increases, in March and May, and two 0.5-point increases, in June and August.
Before the start of the high cycle, the Selic had been reduced to 2% a year, the lowest level in the historical series that began in 1986. Because of the economic contraction generated by the Covid-19 pandemic, the Central Bank had cut the rate to stimulate production and consumption. The rate remained at the lowest level in history from August 2020 to March 2021.
The Selic is the Central Bank's main instrument to keep official inflation under control, as measured by the Broad National Consumer Price Index (IPCA). In February, the indicator closed at 5.6% yoy. Since the end of last year, inflation has been rising because of food, the partial reversal of tax breaks on fuel, and customary increases at the beginning of the year, such as spending on education and health.
The index closed last year above the inflation target ceiling. For 2023, the National Monetary Council (CMN) set an inflation target of 3.25%, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could not exceed 4.75% or fall below 1.75% this year.
In the Inflation Report released in late December by the Central Bank, the monetary authority estimated that the IPCA would close 2023 at 5% in the baseline scenario. The projection, however, may be revised in the new version of the report, which will be released at the end of March.
Market forecasts are less optimistic. According to the Focus bulletin, a weekly survey of financial institutions released by the Central Bank, official inflation should close the year at 5.75%. A month ago, market estimates were 5.89%.
The increase in the Selic rate helps to control inflation. This is because higher interest rates make credit more expensive and discourage production and consumption. On the other hand, higher rates hinder the recovery of the economy. In the last Inflation Report, the Central Bank projected 1% growth for the economy in 2023.
The market is projecting lower growth. According to the latest Focus bulletin, economic analysts forecast a 0.88% expansion of the Gross Domestic Product (GDP, the sum of goods and services produced by the country) this year.
The basic interest rate is used in negotiations of government bonds in the Special System for Settlement and Custody (Selic) and serves as a reference for the other interest rates in the economy. By adjusting it upwards, the Central Bank curbs the excess demand that puts pressure on prices, because higher interest rates make credit more expensive and stimulate savings.
By reducing the basic interest rates, Copom cheapens credit and encourages production and consumption, but weakens inflation control. To cut the Selic, the monetary authority needs to be sure that prices are under control and are not at risk of rising.
(Source: Agencia Brasil)