The Central Bank’s Monetary Policy Committee (Copom) is preparing to raise its basic interest rate, the Selic, by 1.5 percentage points this Wednesday (1) to 10.75%, according to market expectations, reaching double digits for the first time in five years, in the face of threatening inflation and despite affecting economic growth.
The decision, anticipated at the December meeting, in response to the increase in prices, which reached 10.06% in 2021, is expected as the conclusion of the first Copom meeting of the year, which started this Tuesday.
If the average expectation of a hundred consultancies and financial institutions revealed by the BC in the Focus bulletin is confirmed, the increase of up to 10.75% will place the Selic at a level that has not been seen since the second quarter of 2017 (11.25% ).
It is also the eighth consecutive increase in this expansionary cycle, which BC authorities have progressively accelerated since March 2021, when the Selic was at 2%, a historic floor maintained for several months to try to revive an economy affected by the pandemic. .
With the continuity of its policy, the Copom tries to align inflation with the monetary authority’s targets, despite its strategy hampering economic growth in the midst of a declared recession in the third quarter.
In 2021, retail prices had their worst spike in six years, and while the escalation is expected to ease in 2022, the pressure will continue. Aware of the course of inflation, the BC revised its forecasts in December from 4.10% to 5.02%, a figure that exceeds its targets (between 3.5% and 5%) for the second consecutive year.
In addition, it cut its GDP growth expectation from 2.1% to 1%, against the 4.4% estimated for 2021. The bad outlook, however, is higher than the meager 0.30% expansion forecast by the market in latest Focus newsletter.
– End of cycle in sight –
In its previous meeting, the Copom considered it “appropriate for the monetary tightening cycle to advance significantly in contractionary territory”, which will be evident especially this year, due to the prolonged effect of the increase in rates.
But BC President Roberto Campos Neto recently said that the boom cycle “is coming to an end”, which some economists are predicting for May.
Jason Vieira, chief economist at Infinity Asset Management, considers two possible scenarios for this Wednesday, with increases of 1.25 percentage points or 1.50 pp.
“The inflation context that the Central Bank imagined has changed a lot (…) Brazil has more modest inflation”, which stood at 0.73% in December, said Vieira, who believes that the Central Bank “will likely announce the beginning of the end of the monetary tightening process”.
At the end of the high cycle, the market expects the Selic to reach up to 12%, according to an average of the projections of economic institutions consulted by the newspaper Valor.
For this year, in which President Jair Bolsonaro will seek re-election in October, analysts predict uncertainty inherent in the electoral process, in addition to the fiscal risk from increased public spending, which has not dissipated.
The economic context of deteriorating indicators, such as industrial activity, includes a labor market in slow recovery, with high informality and lower wages, in addition to a new impact of covid-19, with new records of contagions in January.
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