To contain inflation, basic interest rates may rise higher in 21 years

The Monetary Policy Committee (Copom) of the Central Bank (BC) meets next week to decide what will be the basic interest rate in force in the Brazilian economy until the end of October. With the recent jumps in inflation, some projections already point to the biggest increase in the Selic rate since 2002.

The decision for the record variation after four consecutive advances in interest rates, which led the Selic to the current level of 5.25% per year, should take into account the surprises brought about by the widespread rise in inflation in recent months.

In August alone, the Extended National Consumer Price Index (IPCA) rose 0.87% and recorded the biggest increase for the month in the last 21 years. In the last 12 months, the variation in prices approached 10%, a level already surpassed in eight Brazilian capitals.

The alternative for raising the interest rate is the monetary policy instrument most used to reduce inflation. This happens because higher interest rates make credit more expensive, reduce the willingness to consume and encourage other investment alternatives.

This Tuesday, BC president Roberto Campos Neto said that the monetary authority’s plan to fight inflation is aimed at a longer horizon and will “do whatever is necessary” to return the price index to the target established by the Monetary Council National (CMN). Still, he said that the BC will not have hasty reactions to each new inflationary data.

“We have an instrument in hand that will be used in the way it needs to be used and we understand that we can take the Selic to where it needs to be taken so that we have a convergence of the target in the relevant horizon,” he said Campos Neto at a BTG Pactual bank event.

Among the financial institutions heard by BC, the median of expectations until the end of last week indicate that the Selic will rise to 6.25% per year, the result of a new variation of 1 percentage point. However, there are already bets that the rise in interest will be up to 1.5 percentage points, which would raise the basic interest rate to 6.75% per year.

The superintendent of the economic advisory at the Brazilian Association of Banks (ABBC), Everton Pinheiro de Souza Gonçalves, assesses that the BC’s verdict should raise the Selic rate by 1.25 percentage points next Wednesday, to 6.5% a year .

“The deterioration of the balance of risks in relation to the previous meeting for inflation requires a greater tightening. Therefore, our expectation is for an increase of 1.25 points. In addition, there should be more increases in the next Copom meetings, ending the year in 8.5%”, predicts Gonçalves.

Since the beginning of the century, the Selic has only increased by more than 1 percentage point on two occasions, in June 2001 (from 16.75% a year to 18.25% a year) and in December 2002 (from 22% a year to 25% per year).

In a position similar to the last Focus report, Rico’s head of economy, Rachel de Sá, states that the Copom should maintain the same pace as the last meeting and raise the Selic to 6.25% per year, which would result in a new interest rate increase at the next group meetings.

“For now, our view is that the Selic will end the year at 7.25% per year, but this projection has an upward bias, which we are watching very carefully, because we don’t think the Central Bank needs to speed up the pace of movements,” says Rachel.