The Central Bank’s Monetary Policy Committee (Copom) begins its third meeting of the year this Tuesday (7) to define the level of the basic interest rate for the national economy. The so-called Selic rate is currently 10.75% per year, and there is a consensus among economists that it can and should be reduced on Wednesday (8). The remaining question is: how much?
Since August 2023, Copom has already cut the Selic rate six times, always by 0.5 percentage points. Before that, the rate had been at 13.75% per year for about a year.
At that time, the committee’s justification for maintaining the basic interest rate at this level was inflation. The Broad Consumer Price Index (IPCA) closed 2022 – the last year of the government of former president Jair Bolsonaro (PL) – at 5.79%, above the target established by monetary authorities.
In 2023, President Luiz Inácio Lula da Silva (PT) took over the government. Inflation began to fall and this created space for interest rates to fall. There was no longer room for speeches about a high Selic to contain credit and reduce demand from people and companies for purchases, which would put downward pressure on prices.
Recently, however, the Copom and the president of the Central Bank himself, Roberto Campos Neto – appointed by Bolsonaro – have raised another hypothesis for a smaller interest rate cut: a drop in unemployment.
According to Campos Neto, with fewer people looking for work, companies are having difficulty hiring. They are then being forced to offer higher wages. This would tend to increase production costs and, ultimately, prices, causing inflation.
The solution suggested by Campos Neto would be to reduce the rate of interest rate declines. The economy would tend to grow at a slower pace, also slowing the fall in unemployment. This would all reduce demand for purchases and inflationary pressure.
The problem is that this would be at the expense of the worker, who has not even recovered his pre-pandemic income.
According to the Brazilian Institute of Geography and Statistics (IBGE), in mid-2020, the Brazilian worker received, on average, around R$3,210. This value dropped to around R$2,750 at the end of 2021. Since then, it has risen more than 13% and reached R$3,120. Still, it is approximately 2.8% lower than four years ago.
IBGE data indicate partial recovery of Brazilian worker income / Reproduction/IBGE
What is Selic?
The Selic rate is a reference for the national economy. It is also the main instrument available to the BC to control inflation in the country.
When it rises, loans and financing tend to become more expensive. This discourages purchases and investments, which contains inflation. On the other hand, economic growth tends to be hampered.
When the Selic falls, the interest charged to consumers and companies becomes lower. There are more people buying and investing. The economy grows, creating jobs and promoting salary increases. Prices, in turn, tend to increase due to demand.
Since taking office, President Lula has defended a reduction in the Selic rate. For him, if it starts to fall more slowly, Campos Neto could be to blame for lower growth.
Inflation
André Roncaglia, economist and professor at the Federal University of São Paulo (Unifesp), sees no reason for a Selic cut of less than 0.5 percentage points. “The Brazilian economy is growing, the unemployment rate is growing again [no início do ano] and inflation is falling”, he said.
This Monday (6), in fact, the Central Bank released another edition of the Focus Bulletin. In it, the forecasts of economists linked to banks for inflation and growth in the Gross Domestic Product (GDP) became even more optimistic.
These economists estimate that the IPCA will close the year at 3.71%. Four weeks ago, the forecast was 3.76%. At the beginning of 2024, it was 3.90%.
The estimate for 2024 is within the range of the inflation target defined by the National Monetary Council (CMN). The target is 3% for this year, with a tolerance range of 1.5 percentage points up or down. That is, up to 4.5%.
Economists’ most current forecast for growth is 2.05%. Four weeks ago, it was 1.90%. At the beginning of the year, they estimated growth of 1.52%.
The federal government estimates that the national economy will grow 2.2% in 2024.
Banks signal
Despite all this data, bank economists are already betting on a 0.25 cut on Wednesday. This is also in the Focus Bulletin.
They also once again raised their expectations for the Selic level at the end of this year. Their most current forecast is that the rate will close 2024 at 9.63% per year. Four weeks ago, they predicted this same rate to be 9% per year.
According to Róber Iturriet Ávila, economist and professor at the Federal University of Rio Grande do Sul (UFRGS), the simple change in banks’ forecasts tends to influence the Copom’s interest rate cut.
“The Focus Bulletin is taken into account in the Copom’s decision, because the Copom is largely based on expectations”, he explained.
For Weslley Cantelmo, economist and president of the Economics and Planning Institute, the banks’ vision is linked to the ideological way in which they analyze the economy. He confirmed that the data reinforces that there is room for a 0.5 point cut.
“The banks are creating an environment in public opinion and this legitimizes the Copom’s decision [por um corte menor]”, he stated. “The government, in turn, has been reinforcing that it would not accept any reduction smaller than that practiced in recent months.”
Editing: Nicolau Soares
