Copom: why the BC reduced the rate of interest cuts and what are the messages about the future of the Selic | Economy

At the last meeting of the collegiate, in March, the committee had reduced the Selic by 0.50 pp and indicated in the statement the possibility of a reduction of the “same magnitude” at this month’s meeting. The pattern had been in place since August, when the Central Bank (BC) began reducing the country’s interest rates.

This forecast about monetary policy is called “forward guidance” by the financial market. It is a way of providing predictability in the conduct of work and greater comfort for internal and external investors.

The change in Brazilian fiscal targets for the coming years and the likely maintenance of North American basic interest rates at high levels for a longer period of time are included in the account.

To understand what made the BC change its direction, you will see in this report:

• Why did the BC fail to comply with the forward guidance?
• What are the Copom’s signals for the interest rate ahead?

Failure to comply with a projection by the BC is not generally welcomed by investors. And a possible reduction in the pace of cuts had already been priced in by the market for a few weeks.

“There were a number of indications that the pace would be reduced, not least because the world changed with the effect of a still strong economy in the United States, with the Fed assuming that the level of inflation had changed. On top of that, we also had a change in the fiscal target”, explained the chief economist at Ágora Investimentos, Dalton Gardiman.

Changing the Brazilian fiscal target to 2025

The measure was announced on April 15, through the 2025 Budget Guidelines Law (PLDO) project. According to the document, the government would repeat the zero deficit next year and would only be able to achieve a surplus (raise more than it spends) in 2026.

It is also a change in projection. Previously, the forecast was to achieve a surplus in 2025 and more significant results in the following years. See below.

Gustavo Sung, chief economist at Suno Research, states that the change in targets increased the level of uncertainty about the country’s fiscal framework and worsened the Central Bank’s balance of risks. With the decision, the government implies that there is a “less fiscal commitment” and “postpones the stabilization of public debt, in addition to reducing the credibility of the new framework”.

The situation of public accounts has been monitored by the BC since the beginning of the cycle of cuts in the basic interest rate. In September, for example, during the second reduction in the Selic, the institution had already highlighted the “importance of implementing fiscal targets” for anchoring inflation expectations and for conducting monetary policy.

This meeting was no different. In a statement released after Wednesday’s decision, the collegiate stated that it “has closely followed recent developments in fiscal policy and their impacts on monetary policy.”

“The Committee reaffirms that a credible fiscal policy committed to debt sustainability contributes to anchoring inflation expectations and reducing risk premiums on financial assets, consequently impacting monetary policy,” the committee said in the document.

For the economist and founding partner of Oriz Partners, Carlos Kawall, there is an “antagonism between Brazil and Brasília” that needs to be observed by investors.

“While Brazil has more solid economic fundamentals, we see that what comes from Brasília often does not help. […] And the fact is that, today, in my view, we are without an authentic fiscal anchor”, said the executive in a live broadcast promoted by Warren Investimentos last Tuesday (7).

“We replaced the anchor with an excessively flexible rule, which causes concern from the point of view of the public debt trajectory. […] There is still a lot of uncertainty about the implementation and real effectiveness of the fiscal rule and, therefore, the debt trajectory [em relação ao] GDP”, he added.

US interest rate outlook

Another important point for this Wednesday’s Copom decision were the signals given by the Federal Reserve (Fed, the North American central bank). At the end of last year, a wave of euphoria settled in the markets with the prospect that the Fed would also begin reducing interest rates from March onwards.

As strong data emerged from the North American economy, which indicated a heated job market and persistent inflation in the country, investor sentiment waned. From March, the projections changed to May and are now in September.

Higher interest rates in the USA make emerging countries less attractive and end up generating a migration of investments into the largest economy in the world, taking money from other markets. In the case of Brazil, displeasure with the Fed came along with the change in the fiscal target, worsening the situation for domestic interest rates.

Although Fed President Jerome Powell has indicated that he finds it “unlikely” that there will be a further increase in the country’s basic rate, the sign is that prices remain at too high levels – which continues to push forward the beginning of interest cuts there.

The longer the situation drags on, the more eager the Brazilian Central Bank becomes to reduce interest rates here too much. In practice, this means that interest rates should take longer to fall or become higher at the end of the cutting cycle.

Even before this Wednesday’s Copom, the market was already speaking out: in the Focus bulletin (a report that brings together economists’ projections), estimates for the Selic rate have already gone from 9% to 9.63% in 2024.

In addition to the decision to disregard the forward guidance and reduce the pace of Selic cuts, the Central Bank also failed to see the possibility of further cuts ahead.

According to a statement released after the decision, the committee reported that, unanimously, “it assesses that the uncertain global scenario and the domestic scenario marked by resilience in activity and unanchored expectations demand greater caution.”

The collegiate also highlighted that “monetary policy must remain contractionary until it consolidates not only the disinflation process but also the anchoring of expectations around its targets” and reinforced that the “extent and adequacy of future adjustments in the rate of interest rates will be dictated by the firm commitment to converge inflation to the target”.

According to experts interviewed by the g1although a more cautious tone from the BC is expected by the market, given the current macroeconomic scenario.

Even so, the fact that it was not a unanimous decision tends to weigh on the market, which remains uncertain about how the transition to the new management of the Central Bank should be. The term of Roberto Campos Neto, current president of the institution, ends at the end of 2024.

For the founding partner of Armor Capital Alfredo Menezes, the dissent in the decision is one of the “worst things” that could have happened at this meeting.

“The dissent says that this new Central Bank, which will enter, is more dovish [menos agressivo na condução da política monetária]that we will have higher average inflation and lower interest rates in the economy”, he commented during a live broadcast by Warren Investimentos.

See how the voting went at this meeting:

The following Committee members voted for a reduction of 0.25 percentage points:

• Roberto de Oliveira Campos Neto (president);
• Carolina de Assis Barros;
• Diogo Abry Guillen;
• Otávio Ribeiro Damaso;
• and Renato Dias de Brito Gomes.

The following members voted for a reduction of 0.50 percentage points:

• Ailton de Aquino Santos;
• Gabriel Muricca Galípolo;
• Paulo Picchetti;
• and Rodrigo Alves Teixeira.