01/11/2023 – 13:07
The first week of November is marked by the penultimate meeting of the Central Bank’s Monetary Policy Committee (Copom do BC) in 2023. This Wednesday, the 1st, the Copom decides again on the basic interest rate – the Selic – and the expectation is another cut of 0.50 percentage points (pp). In parallel, the economic team of the Luiz Inácio Lula da Silva (PT) government reinforces targets of zero deficit in public accounts for 2024 and the commitment to the fiscal framework – which the market and BC directors are keeping an eye on.
+ Haddad: ‘My goal is set’
The Selic rate reached 12.75% after two consecutive drops. The trajectory remained static for around 10 months at 13.75%, an index harshly criticized by Lula. According to analysts, the Copom, which includes the president of the BC, Roberto Campos Neto, and nine other advisors, should vote for interest rates to fall to 12.25% per year. The expectation is to close 2023 with interest rates at 11.75%.
“My understanding is that the Copom will persist with the 0.50 pp cuts, but it is possible that the Council will begin to discuss the terminal rate and eventually slow down the cuts if the uncertain external scenario persists or worsens”, assesses André Roncaglia , economist and professor at the Federal University of São Paulo (Unifesp).
According to him, maintaining higher American interest rates for longer and the price of energy due to wars could also influence different decisions for meetings in 2024.
“What we saw in recent weeks was the market starting to diverge regarding the pace of cuts next year and mainly regarding the Selic at the end of this interest rate cut cycle, with the main houses in the Focus bulletin speaking at around 9% and the future interest market pricing something close to 11% terminal rate”, also assesses the economist and founding partner of GT Capital, Rodrigo Azevedo.
Reginaldo Nogueira, PhD in Economics and senior director at Ibmec, follows the same line. “I don’t believe in a surprise for the Copom’s decision this week, and we should continue with the 50 basis point cut. The scenario for 2024, however, has become more uncertain. Inflation expectations for next year increased, reaching 3.9%. The international scenario is more complex, with the wars in Ukraine and the Middle East,” he explains.
At the same time that Brazil decides its interest rates, the USA also has representatives meeting to determine its rate, which should remain unchanged at 5.25%-5.50%. Also in North America, there is concern about the inflation target: the president of the Federal Reserve Bank, Jerome Powell, stated that inflation is far from the 2% target.
“Considering the interest rate differential and the effects on the economy, a higher rate for longer in the US tends to limit the Copom’s efforts to reduce the Selic here. This is because by reducing interest rates and consequently reducing the differential, foreign flows will seek higher risk premiums elsewhere, impacting the exchange rate, which in turn will impact inflation”, compares Jadye Lima, economist at WIT Invest.
Tax framework
The Minister of Finance, Fernando Haddad, did not confirm, during an interview, changes or the continuation of the target of zeroing the public deficit by 2024. The scenario can be considered uncertain and could also affect future decisions by the Monetary Policy Committee.
“Fiscal uncertainties have resurfaced with the government’s back and forth regarding the deficit target for next year. There was an expectation that the deficit approved in the budget would be zero, but the political movement makes this scenario more difficult, casting doubt on the recently approved fiscal framework itself. This has put pressure on expectations and made projections for the next steps more complicated”, argues Nogueira.
Roncaglia argues that, given the history of Copom’s arguments, including its justifications in the minutes, the discussion about public accounts targets may remain on the radar.
“It is possible that the Copom will also address this issue of debt stability again, which in my view is unfounded, because there has been no profound change in terms of market expectations, the fiscal prism already indicates that the market will predict a deficit of 308% and 1% for 2024, even though the Ministry of Finance and the economic team are there fighting to try to close this deficit”, he concludes.
The FED is expected to announce the new interest level at 3 pm (Brasília time); The Copom announcement takes place at 6pm.
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