The Central Bank reported this Tuesday (21) that it forecasts a sharper slowdown in economic activity and added that, to contain inflation, which is still high and widespread, it will need to raise interest rates further and keep them high for a longer period of time. .
The information was disclosed through the minutes of the last meeting of the Central Bank’s Monetary Policy Committee (Copom) held last week, when the economy’s basic interest rate was raised from 12.75% per year to 13.25% per year. year – an increase of 0.5 percentage point.
It was the eleventh consecutive increase in the Selic rate, which reached the highest level since December 2016.
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In the minutes, the BC reaffirmed the indication, already given last week, that it “anticipates” a new increase in the Selic rate at its next meeting, in early August, of equal or lesser magnitude. That signals a rise of 0.5 percentage point or less.
“The Copom emphasizes that the future steps of the monetary policy may be adjusted to ensure the convergence of inflation to its targets”, he informed.
The BC assessed that the growth in Gross Domestic Product (GDP) recorded in the first quarter, driven by the service sector, is linked to the process of normalization of the economy after the pandemic.
When looking ahead, the Copom sees a slowdown in the level of activity in the country.
“The Committee assesses that activity should decelerate in the coming quarters when the lagged impacts of monetary policy [de alta dos juros] if they make more gifts”, he informed.
The BC also estimated a slowdown in the rest of the world, in the wake of the war in Ukraine and high inflation, resulting in higher interest rates in other economies.
“The Committee already anticipates a slowdown in global activity in the coming quarters, due to geopolitical tensions and the tightening of monetary policy. [alta dos juros] and the ongoing financial conditions in several central economies”, he concluded.
Copom also cited the uncertainty about the future of the country’s “fiscal framework”, that is, about the rules for public accountsand also the effect of policies that stimulate the economy in an election year, which, in his view, can bring an “upward risk for the inflationary scenario and for inflation expectations”.
Currently, the country’s main fiscal rule is the spending cap, a mechanism by which most expenditures cannot grow above the previous year’s inflation. However, analysts have pointed out difficulties in maintaining this mechanism in the face of the growth of mandatory spending – which is flattening the budget of ministries.
To calibrate the interest level, the system adopted is that of inflation targeting. At this moment, the BC is already adjusting the Selic rate to reach the inflation target for next year, since decisions on interest rates take from six to 18 months to have a full impact on the economy.
For 2023, the inflation target was set at 3.25%, and it will be considered formally met if it fluctuates between 1.75% and 4.75%.
In the reference scenario with which the BC worked for the interest rate, based on research carried out with the financial market, interest rates would advance to 13.25% per year in 2022, fall to 10% in 2023 and to 7.5% per annum in 2022. % per year in 2024.
However, the institution assessed that interest rates will have to be higher, and remain high for a longer period of time, to reach the 2024 inflation target – whose ceiling is 4.75%.
“The Committee assesses, based on the projections used and its balance of risks, that the strategy required to bring the projected inflation to 4% [para 2023] around the target on the relevant horizon combines, on the one hand, terminal interest rate above that used in the reference scenario and, on the other hand, maintenance of the interest rate in a significantly contractionary territory [juros altos] for a longer period than the one used in the reference scenario”, he informed.
High and widespread inflation
The Copom assessed that the consumer inflation remains high, with an increase spread across several components, proving to be more persistent than anticipated.
“Inflation for services and industrial goods remains high, and recent shocks continue to lead to a strong increase in food and fuel components,” he said.
The Copom also noted that there was “deterioration both in the short-term inflation dynamics and in its longer projections, even though the scenario is surrounded by uncertainty and above-usual volatility”.
The IPCA — the country’s official inflation — stood at 0.47% in May, with deceleration compared to the previous month. Even so, it accumulated an increase of 11.73% in twelve months.
The BC reported that, according to the survey carried out with the financial market, inflation would be 8.5%, 4.7% and 3.25%, respectively, in 2022, 2023 and 2024. The BC already estimated an IPCA of 8.8% for 2022, 4.0% for 2023 and 2.7% for 2024.
These official estimates by the Central Bank, however, do not yet include the impact of tax measures on fuel, electricity and telecommunications prices, which “significantly reduce inflation in the current year, although they raise, to a lesser extent, inflation on the horizon relevant monetary policy [até o fim de 2023]”.