The Focus Report is released on time by the Central Bank (BC) at 8:30 am on every Monday when there is a banking day. The publication began in May 2002. In these nearly two decades, market professionals have become accustomed to starting the week observing the Focus to find out about expectations for inflation, interest rates, the dollar and economic growth. And this Monday’s edition (26) showed a change of direction by the specialists. By indicating that the benchmark Selic interest rate should end 2021 at 7% per year, market professionals started to expect a conservative BC in interest rates.
Explaining. The BC’s task is to calibrate interest rates in order to enforce the inflation target established by the National Monetary Council (CMN). For 2021, the target is 3.75%. For 2022, it drops to 3.5%, and retreats another 0.25 percentage point in the following two years, reaching a tight 3% per year in 2024. In other words, the BC has to calibrate interest rates to keep prices low for less for just under three and a half years.
This task will not be easy. On Friday (23), the Brazilian Institute of Geography and Statistics (IBGE) released the Extended Consumer Price Index 15 (IPCA-15) of July, showing a price increase of 0.72% in the month. With the result, the preview of inflation had the biggest high for a month of July since 2004, when it reached 0.93%.
In accumulated until July, the index is already at 4.88%. In 12 months, the accumulated inflation is 8.59%. It is way above the target for the year, even considering the tolerance margin of 1.5 percentage points, which allows for inflation of up to 5.25%.
The IPCA-15 is practically the same as the IPCA (a regression shows a correlation coefficient of 99.7% over the last ten years). The only difference is the price collection period, which takes place between the 16th of the previous month and the 15th of the current month, and is released from eight to ten days later.
As the IPCA is very important for the economy, it makes sense to release a prior survey. Thus, it works very well as a preview of “official” inflation, and shows that the BC will have work to make prices converge to the target.
The account is simple. Let’s assume that the IPCA from January to July accumulates the same 4.88% as the IPCA-15. For the BC to fulfill its task, inflation would have to rise “only” 0.37 percentage points in the accumulated result for the next five months. This is practically impossible. The IBGE report itself indicates that one of the main reasons for the high inflation was the salty readjustments of electricity, which rose 4.79% in the month.
Moral of the story: it is quite likely to wait for interest rates to continue rising so that the BC can bring inflation down closer to the center of the target. In other words, the BC will no longer practice a “stimulating” monetary policy, dedicated to stimulating the economic growth that was affected by the measures to combat the pandemic. The account of the last edition of the Focus Report shows that market professionals started to expect a more conservative BC, raising interest rates to lower inflation, despite this causing a slowdown in the economy – which is no longer very heated.
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