05/08/2024 – 22:49
The Central Bank decided this Wednesday, 8, to reduce the pace of monetary easing by making a 0.25 percentage point cut in the Selic rate, to 10.50% per year, with divergence from directors appointed by President Luiz Inácio Lula da Silva, and abandoned his recommendation on the future of basic interest rates.
According to the statement, the decision was supported by president Roberto Campos Neto and directors Carolina Barros, Diogo Guillen, Otávio Damaso and Renato Gomes. Nominated by Lula, Ailton de Aquino, Gabriel Galípolo, Paulo Picchetti and Rodrigo Teixeira voted for a larger reduction, of 0.50 percentage points.
Despite the divergence, the statement reported that the Committee, unanimously, “assesses that the uncertain global scenario and the domestic scenario marked by resilience in activity and unanchored expectations demand greater caution”.
Division raises uncertainty about next steps
The separation between the more flexible position of the BC board members appointed by Lula and the tougher vision of the components appointed or reappointed during the government of former president Jair Bolsonaro may increase uncertainty about the next steps of monetary policy, as new nominations lead the government to have the majority of nominees on the BC board.
Currently, the authority’s leadership is made up of four directors appointed by Lula, while five have been in post since Bolsonaro’s administration. The next mandates to expire, in December this year, are those of Campos Neto, Carolina Barros and Otávio Damaso.
“The tone of the statement was harsh, but the highlight of the meeting was the split score (5×4), which removes a large part of this assessment and adds the ingredient of a clear division between the members appointed by the current government and the previous one. ”, said João Savignon, head of macroeconomic research at Kínitro Capital.
For the chief economist at BV bank, Roberto Padovani, the division in the board “in a way, reveals the preferences of the next Central Bank”.
In the statement, the BC informed that the 0.25 point cut is compatible with the strategy of inflation convergence around the target over the relevant horizon.
Withdrawal of future nomination
By withdrawing the “forward guidance”, or the future indication for monetary policy, the BC reinforced “with special emphasis” that the extent and adequacy of future adjustments in the interest rate will be dictated by the “firm commitment to convergence of inflation to the goal”.
After the Copom indicated in March that it predicted a 0.50 percentage point cut in basic interest rates this month if the expected scenario was confirmed, which already represented a shortening in relation to the indications made in previous meetings, which had been pointing to two equivalent cuts Ahead, public statements from the BC command confused market forecasts.
In presentations made in April, President Campos Neto highlighted the increase in uncertainty and mentioned a possible reduction in the pace of monetary easing if the uncertain scenario continued. Then, in an indication that the BC had even abandoned the guidance for the 0.50 point cut at the May meeting, he stated that the authority was unable to give ‘guidance’ because there was “very great uncertainty”.
After the statements, part of the market began to price a 0.25 percentage point cut in the Selic at this week’s Copom meeting.
Of the 39 economists consulted in a Reuters survey last week, 22 believed in a reduction of 0.25 points, while 17 said they expected a cut of 0.50 points. The change in perception was also reflected in this week’s BC Focus bulletin, which showed projections including a cut of just 0.25 points in the meeting.
The 0.25 point cut came after six consecutive reductions of 0.50 points, in a loosening cycle that began in August 2023, when the Selic was at 13.75%. The August meeting of last year had been the last to see a decision with divergence from the BC board.
In the statement, the Copom said that the external environment is more adverse, due to the “high and persistent” uncertainty about the start of monetary easing in the United States and the speed of global disinflation. The analysis echoes recent statements by Campos Neto, who has cited the risk of loss of liquidity in emerging countries with the possible scenario of higher interest rates for longer in the United States.
In the domestic scenario, the BC said that economic activity and labor market indicators have shown greater dynamism than expected. These factors have been a source of concern for the monetary authority’s board of directors due to the pressure that may be generated on prices.
The BC also highlighted unanchored inflation expectations and underlying inflation measures (which exclude more volatile data) above the target.
Recent inflation data came in below expectations, but market expectations for price behavior remain above the 3% target established for this and the next two years.
This Wednesday, BC worsened its own projections for price behavior in relation to the previous meeting. The monetary authority reported that, in its reference scenario, the estimate for inflation was from 3.5% to 3.8% in 2024 and from 3.2% to 3.3% in 2025.
Supervisor
After the government relaxed targets for public accounts, the BC also stated that it “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,” he stated.
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