BRASILIA – The president of central bank, Roberto Campos Neto, said on Tuesday, 14, that he will not change the flight plan of monetary policy every new high frequency number of inflation that is disclosed. But he stressed that the basic interest rate will be taken wherever necessary to reach the inflation target. “We’re going to take Selic where we need it, but we’re not always going to react to high frequency data,” he said.
After the negative surprise of the IPCA August (0.87%), the market started to consider an increase between 1.25 and 1.50 percentage points in the Selic at the next meeting of the Monetary Policy Committee (Copom), on the 21st and 22nd of this month, which would be an acceleration of the pace compared to the last meeting, when there was an increase of 1 point.
The BC president stated that there have never been so many inflation shocks in such a short period in Brazil, highlighting the rises in food, electricity and fuel prices. Campos Neto acknowledged that inflation in 12 months has been running well above the target and said that the BC has been observing the cores to verify the spread. According to the BC president, the increase in services and stronger readjustments in components that were dammed were already expected.
Campos Neto also repeated that inflation expectations for 2021 and 2022 are rising and that the BC is evaluating the differences between market and Copom forecasts. He participates in BTG Pactual’s MacroDay 2021 event, which takes place in person, following, according to the institution, health protocols.
Readjustments in fuels
Campos Neto also spoke about the transfers made by Petrobras to fuel prices. “Petrobras passes through prices much faster than in other countries,” he said, justifying the effect of the rise in commodities (commodities, including oil) on Brazilian inflation.
During the Michel Temer government, Petrobras changed its fuel price policy to follow parity with the international market. In other words, the fuel sales prices charged by the state-owned company started to follow the value of oil in the international market and the exchange rate variation. Thus, a higher price of the commodity and a devaluation of the real have the potential to contribute to a rise in prices in Brazil.
After the shock caused by the coronavirus pandemic, the global economy should have a robust growth this year, which increases the search for oil in the international market and, consequently, helps to push prices up.
In the accumulated result for this year until August, the price of gasoline has already advanced 31%, while that of diesel has accumulated an increase of 28%, according to the IPCA. The formation of fuel prices is composed of the price charged by Petrobras at the refineries, plus federal (PIS/Pasep, Cofins and Cide) and state (ICMS) taxes, in addition to the cost of distribution and resale. There is also the cost of anhydrous ethanol in gasoline, and diesel has the impact of biodiesel.
The BC president also highlighted that Brazilian inflation was also heavily influenced by climatic factors, in addition to the water crisis. “We had heat waves, then frosts, then rain problems.” According to him, there will be more prolonged inflation in the world, with slower normalization.
Economists project 8% IPCA at the end of the year
On Monday, 13th, after another week of political crisis and new negative surprises in inflation, the more than 100 economists consulted weekly by the Central Bank carried out a new round of deterioration in expectations for this and next year. The financial market continues to bet on higher prices, lower economic growth and even higher interest rates in 2021 and 2022.
The Market Focus Report’s projection for inflation in 2021 moved even further away from the ceiling of the target pursued by the Central Bank. Economists have changed the forecast for the IPCA – the official price index – from 7.63% to 8% at the end of this year. A month ago, it was at 7.05%. The projection for the index in 2022 went from 3.98% to 4.03%.
Economists’ projection for inflation is well above the 2021 target ceiling of 5.25%. The center of the target for the year is 3.75%, with the margin of tolerance being 1.5 points (from 2.25% to 5.25%). The 2022 target is 3.50%, with a margin of 1.5 points (from 2.00% to 5.00%).
Considering only the 76 analysts who responded to the survey last week, the projection for the 2021 IPCA was even higher, going from 7.76% to 8.20%. For 2022, the estimate for this group went from 3.98% to 4.10%.
The inflation target is set by the National Monetary Council (CMN). To achieve it, the Central Bank raises or lowers the economy’s basic interest rate. In the event that the inflation target is not met, BC president Roberto Campos Neto will have to send an “open letter” to Guedes, explaining the reasons for the overflow. The last time this happened was in January 2018 and the reason was the non-compliance in another direction, as the inflation of the previous year was below the target floor. Former president Ilan Goldfajn justified, at the time, that the biggest impact for inflation to have collapsed in 2017 was the drop in food due to the record harvest.
With inflation driven by the prices of food, fuel and electricity, the market already expects the BC to raise the Selic base rate even more forcefully this year. The median of forecasts for this year went from 7.63% to 8% per year. A month ago, economists expected a 7.50% Selic at the end of 2021.
In early August, Copom raised the Selic rate for the fourth consecutive time and accelerated the pace by increasing it by 1.00 percentage point, to 5.25% per year. At the same time, the collegiate signaled a new increase of the same magnitude for the next meeting this month. However, the persistence of inflation and the worsening of the water crisis have reinforced the market’s bets on higher Selic rates next week.
Towards the end of 2022, financial market economists raised expectations for the Selic rate from 7.75% to 8% per year, which assumes stability in the economy’s basic interest rate for next year.