Disinflation could allow a 2nd round of Selic reduction in 2025, but lack of fiscal control is a risk

The continuity of the disinflation process in the country may allow a second round of Selic reduction in mid-2025. The estimate gains strength with the prospect of a more relaxed Central Bank board regarding price control from next year. A bad trajectory of public accounts, however, represents a risk in the scenario, according to economists interviewed by BroadcastGrupo Estado’s real-time news system.

Broadcast Projections survey published last week revealed that, of 53 financial institutions that see the end of the current cycle of basic interest rate cuts in 2024, at least 51% project a lower Selic at the end of 2025. Among the 27 that adopt this premise, the range of projections for the rate varies from 8% to 10% at the end of the current round of reductions and from 7.50% to 9.75% at the end of next year.

“As we have more stable inflation, close to 3.5%, and with the fiscal risk relatively controlled, there will be room for a residual adjustment of the Selic in 2025”, says the chief economist at Banco Inter, Rafaela Vitória. She predicts that the current cycle of cuts will end in December, at 8.5%, but that over the next year the interest rate will move towards the equilibrium level, which is estimated at 8.0%.

An even lower base fee is not completely ruled out, although it is not Inter's base case scenario. “If the fiscal adjustment is consolidated, even if it is slower than the government proposes, eventually, we could even talk about a lower Selic, of around 7.5%”, he states.

“However, we will still have three more years of a government that has a fiscal adjustment project, but also a line to promote spending and economic development through the State.” In this battle, the space for a Selic below 8.0% is limited, he emphasizes.

The chief economist at Nova Futura Investimentos, Nicolas Borsoi, considers that the current cycle of cuts should extend until September 2024, with the Selic at 9.0%. A new round next year would take the rate to 8.0%.

Borsoi says that the future movement will be linked to the change in the focus of monetary policy from inflation from 2026 to 2027, a period in which he assesses that, given the continuity of the disinflation process, market expectations will be closer to the target, of 3.0 %. “With this, the BC will not need to extend its restrictive monetary policy and will be able to move to a more neutral rate.”

Depending on the new composition of the BC board, with the chance of a more lenient president of the municipality – the mandate of the current one, Roberto Campos Neto, ends at the end of this year –, an even lower rate could become possible, adds the economist at New Future.

He emphasizes, however, that this is not the base scenario of the house. “Gabriel Galípolo, for example, who is one of those listed, has demonstrated a more neutral and less lenient behavior than some people might imagine.”

For the senior economist and partner at Tendências Consultoria, Silvio Campos Neto, on the other hand, the change in command of the BC is already one of the factors that corroborate a new round of Selic cuts in 2025. “The trend seems to be a slightly more BC dovish. Not that he will deviate from his technical analysis, but it leaves room for further reductions.”

Even so, the main vector must be the continuity of the disinflation process, even without the total convergence of expectations to the target, combined with the expected slowdown in the Gross Domestic Product (GDP). The Tendências economist predicts Selic at 9.5% at the end of the current cycle of cuts, in July, and at 9.0% at the end of 2025.

Uncertainty.

The main obstacle to resuming Selic cuts in 2025 could be the fiscal issue, highlights Campos Neto. “A more stimulating policy, supporting demand”, he details. “We saw this in recent indicators, such as the BNDES' industry financing policy”, he states, in reference to the release of the government's new industrial policy.

The international environment can also make it difficult to achieve the scenario. “We still don’t know much about the rate at which interest rates will fall in the United States and what the market’s reaction will be,” he says. A more pronounced downward cycle of the dollar in the world, with influence on the Brazilian exchange rate, on the other hand, would open space for the BC to be more aggressive in rate cuts, he assesses.

The development of the fiscal scenario and its effects on inflation are also listed as risks by Vitória, from Inter. The economist predicts that the Broad National Consumer Price Index (IPCA) will end 2024 close to 3.8%, but considers that an expansion in government spending could stimulate demand and household consumption and, in a low-level scenario of investment, this could generate inflationary pressures ahead, especially on the labor market.

An unfavorable fiscal development, he adds, with a possible impact on inflation expectations could even prevent a Selic of 8.5% at the end of the current cycle of cuts. “Expectations are relatively anchored, at 3.5%, which is not the center of the target, but it is a good anchor”, he argues. “If we have an acceleration of fiscal expansion without contingencies and without any trigger for 2025, we could see these expectations becoming unmoored and, then, the Selic terminal [no fim do atual ciclo] it could be higher, closer to 9% or 9.5%.”