Banco Central do Brasil kept its benchmark interest rate unchanged for the fifth consecutive meeting in February 2023, in line with market expectations. The decision however defied intense pressure from the new government of President Luiz Inacio Lula da Silva to reduce borrowing costs. Policy makers cited rising inflation expectations, with the annual rate at 5.79% in December 2022 which was recorded in double digits from September 2021 to July 2022. The Brazil decision came just hours after the US Federal Reserve delivered its increase of 25 basis points to interest rates.
The Central Bank last year having aggressively hiked its benchmark interest rate with twelve consecutive interest rate hikes since 2021 when the bank began its current tightening cycle early last year, the Selic was at a record low 2%. The lending rate is now at its highest level since 2017.
Highlights
- The bank held the Selic at 13.75% late on Wednesday, holding a monetary tightening cycle that’s increased borrowing costs by 11.75 percentage points since March 2021.
- Result was a unanimous decision.
- The move was expected.
- Second scheduled policy meeting after the election of leftist Luiz Inacio Lula da Silva as President
- Inflation expectations have risen to 5.8% for 2023 and 3.6% for 2024. Next year, the target is 3%.
- In the bank’s view, “Taking into account the uncertainty of the scenarios, the committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be enough to ensure the convergence of inflation,” policymakers wrote in the bank’s weekly survey. They dropped the reference to maintaining the rate beyond the period expected by the market.
- “The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown additional deterioration, especially at longer horizons,” they added.”
Finance Minister Fernando Haddad criticized the statement
Haddad said it was “very concerning,” and the central bank’s next decision could put the country’s fiscal position “at risk.” “Copom even signals the possibility of an increase in the interest rate, which is already the highest in the world today,” he told reporters, in reference to policymakers’ insistence that they would not hesitate to resume hikes if disinflation did not happen as expected.
Inflation has cooled to 5.6% in the 12 months through February, but it is still far above this year’s 3.25% official target. Meanwhile, the central bank’s inflation expectations have risen to 5.8% for 2023 and 3.6% for 2024. Next year, the target is 3%.
Brazil’s 12-month inflation rate had remained above 10% since September. Policy makers led by Roberto Campos Neto are seeing early signs of easing inflation. Transportation costs are declining on the back of fuel tax cuts that Bolsonaro has pushed for. Financial conditions are tightening.
Banco Central Do Brasil Comitê de Política Monetária (Copom)
Monetary Policy Statement March 22, 2023
Copom left the Selic rate to 13.75% p.a.
In its 253h meeting, the Copom decided to maintain the Selic rate at 13.75% p.a.
The following observations provide an update of the Copom’s scenario:
- Since its previous meeting of the Monetary Policy Committee (Copom), the global environment has deteriorated. The episodes involving banks in the United States and Europe have increased the uncertainty and the volatility in markets and require monitoring. At the same time, recent data on global activity and inflation remain resilient and the process of monetary policy tightening in major economies continued to advance.
- Regarding the domestic scenario, the recent set of indicators of activity continues to be in line with the deceleration expected by Copom. Consumer inflation as well as the various measures of underlying inflation are above the range compatible with meeting the inflation target. Inflation expectations for 2023 and 2024 collected by the Focus survey have increased, and are around 6.0% and 4.1%, respectively.
- Copom’s inflation projections in the reference scenario* also increased and stand at 5.8% for 2023 and 3.6% for 2024. Inflation projections for administered prices are 10.2% for 2023 and 5.3% for 2024. The Committee decided again to emphasize the six-quarter-ahead horizon, which refers to the third quarter of 2024, in which the 12-month inflation projection stands at 3.8%. In an alternative scenario, with a constant interest rate throughout the relevant horizon, inflation projections stand at 5.7%, 3.3% and 3.0% for 2023, the third quarter of 2024 and the year 2024, respectively. 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; (ii) the uncertainty about the fiscal framework and its impacts on the expected path of the public debt; and (iii) a larger or more persistent deanchoring of long-term inflation expectations. Among the downside risks, it should be noted (i) an additional reduction in the prices of international commodities measured in local currency; (ii) a greater than projected deceleration of global economic activity, particularly due to adverse conditions in the global financial system; and (iii) a slowdown in domestic credit concession larger than what would be compatible with the current stance of monetary policy.
- On one hand, the recent reinstatement of fuel taxes has reduced the uncertainty of the fiscal results in the short term. On the other hand, the current scenario, marked by high volatility in financial markets and deanchored long-term inflation expectations from the targets, requires further attention when conducting monetary policy. The Committee judges that the deanchoring of long-term inflation expectations raises the cost of the disinflation that is needed to reach the targets established by the National Monetary Council. In this scenario, Copom reaffirms its commitment to set monetary policy to meet the targets.
- Considering the assessed scenarios, the balance of risks, and the broad array of available information, Copom decided to maintain the Selic rate at 13.75% p.a. The Committee judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes 2023 and, to a larger degree, 2024. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.
- Taking into account the uncertainty of the scenarios, the Committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a long period will be enough to ensure the convergence of inflation. The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets, which have shown additional deterioration, especially at longer horizons. The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.
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.
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.
* In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.25 and evolves according to the purchasing power parity (PPP). The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy flag is assumed to be “yellow” in December 2023 and 2024. The value for the exchange rate is 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.
Source: Banco Central Do Brasil
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