Banco Central do Brasil kept its benchmark interest rate unchanged for the fourth consecutive meeting in February 2023, in line with market expectations. 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. Policy makers are seeing signs of easing inflation, 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.
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.
- First scheduled policy meeting after the election of leftist Luiz Inacio Lula da Silva as President
- Inflation expectations for 2023 and 2024 collected by the Focus survey are around 5.7% and 3.9%, respectively.
- In the bank’s view, “The global environment continues to be adverse and volatile, marked by prospects of below-potential global growth for next year, high volatility of financial assets and an inflationary environment under pressure, despite more positive signs at the margin .”
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, with the annual rate below 10% for the first time in a year. 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 February 1, 2023
Copom left the Selic rate to 13.75% p.a.
In its 252th 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:
- The global environment continues to be adverse and volatile, marked by prospects of below-potential global growth for next year, high volatility of financial assets and an inflationary environment under pressure, despite more positive signs at the margin. The process of monetary policy tightening in advanced economies and the stronger market sensitivity to fiscal fundamentals require more caution by developing economies. However, recent global activity data has shown some resilience, and the relaxation of sanitary restrictions in the Chinese economy attenuates the possibility of new global supply chain disruptions;
- Regarding the Brazilian economy, the recent set of indicators continues to be in line with the scenario of deceleration expected by Copom;
- Notwithstanding some recent moderation, 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 are around 5.7% and 3.9%, respectively;
- Copom’s inflation projections in the reference scenario* stand at 5.6% for 2023 and 3.4% for 2024. Inflation projections for administered prices are 10.6% for 2023 and 5.0% 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 3.6%;
- In an alternative scenario, with a constant interest rate throughout the relevant horizon, inflation projections stand at 5.5%, 3.1% and 2.8% for 2023, the third quarter of 2024 and 2024, respectively; and
- 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 still heightened uncertainty about the country’s future fiscal framework and fiscal stimuli that support aggregate demand, partially incorporated in inflation expectations and asset prices; and (iii) an output gap tighter than the one currently adopted by the Committee in its reference scenario, especially in the labor market. 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; and (iii) the continuity of tax cuts assumed to be reversed in 2023.
The current scenario, particularly uncertain on the fiscal side and with inflation expectations drifting away from the inflation target on longer horizons, requires further attention when evaluating risks. The Committee judges that this scenario 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 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 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.
The Committee remains vigilant, assessing if the strategy of maintaining the Selic rate for a longer period than in the reference scenario 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 deterioration at longer horizons since the previous meeting. 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 5.15 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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