By maintaining rates of interest at 13.75%, Copom sends a message to the following authorities
Every Monetary Policy Committee (Copom) meeting, regardless of not surprising the market, comes with a statement that is read carefully by investors. Pay attention to the commas in search of hidden meanings that may signal a direction of where interest is going.
This Wednesday, December 7, ten out of ten analysts knew that interest rates would be maintained at 13.75% per annum. But the Copom communiqué, in justifying the decision, didn’t even need the market’s guesswork. Clearly, the Copom sent a message to the next government.
By warning that there are still risk factors for inflation, the statement says that there is “high uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that imply sustaining aggregate demand, partially incorporated in inflation expectations and in prices of active.”
Even the statue that symbolizes Justice in front of the Federal Supreme Court (STF), at Praça dos Três Poderes, which does not see, does not hear or does not see, understood what Copom meant. It is a warning about the spending ceiling and the effects of the Transition PEC on public accounts.
The alert comes at a time when the newly elected government of President Luiz Inácio Lula da Silva seeks to approve a PEC in Congress that expands the spending ceiling of the Bolsa Família program by R$ 145 billion to maintain the payment of a benefit of R$ 600 from Jan.
The initiative is currently in the Senate and was approved by the Constitution and Justice Commission (CCJ) on Tuesday night, December 6th.
In practice, if this happens, the Copom may take longer to begin its fiscal easing policy. The market expected this to start happening in the second half of 2023. But there are already signs that it will take even longer.
In a long report on the Brazilian economy, Credit Suisse already signals that the interest rate cut should only happen from 2024. According to the report, fiscal policy represents the main risk for Brazil in the 2023-2024 biennium.
“The Brazilian economy has no idle capacity, expected inflation for 2023 and 2024 is already above target, and a fiscal expansion at this point in the cycle will prevent a drop in interest rates,” said Solange Srour, an economist at Credit Suisse.
These uncertainties are issues that are also of concern to the Copom. Committee members highlighted that there is “high uncertainty about the future of the country’s fiscal framework and additional fiscal stimuli that imply sustaining aggregate demand”.
Therefore, the “special attention” of the Copom, especially regarding the “effects on asset prices and inflation expectations, with potential impacts on the dynamics of prospective inflation”.
Even with these doubts, the Copom decided not to change the Selic because it understands that it still reflects “the uncertainty surrounding its scenarios and a balance of risks with even greater variance than usual for prospective inflation”.
For Copom members, the decision is compatible with their strategy of convergence of inflation towards the target in the coming years. For 2023, the National Monetary Council (CMN) established a target of 3.25% and 3% for 2024.
“The communication from the authority was very much in line with what we expected,” said Étore Sanchez, chief economist at Ativa Investimentos, in a note. “The authority reinforced concern regarding the fiscal outlook, although nothing has been consolidated at this time.”
Ativa continues to project that the Copom will keep the Selic at 13.75% per year until, at least, the May 2023 meeting, but stated that the expectation may change depending on the progress of the fiscal projects being processed in Congress.
For Tatiana Nogueira, an economist at XP, it is still too early for the Copom to change its stance, believing that it will remain on hold until there are clear signs about the local fiscal scenario in the coming years.
“Thus, the committee should keep rates at current (contractive) levels for a long period to ensure the convergence of inflation to the target path”, she says, in a note.