Roberto Campos Neto said that it is still too early to talk about reducing interest rates — souring the market and pushing future interest rates up and the stock market down.
With the toughest speech, the president of the Central Bank signaled that the Selic will remain high for longer than priced by the market.
“We don’t think about interest rate cuts at the moment,” said Campos Neto. “We thought of finishing the work and that means the convergence of inflation.”
According to him, there has been a recent relief from the rise in prices, but largely under the influence of “government measures” to reduce taxes. “There is still an element of great concern,” said the BC president. “The battle is not won.”
Bruno Serra, the BC’s monetary policy director, was even more incisive and said that he considers it “inconsistent” for the market to anticipate a fall in the Selic rate while inflation for the next few years is above the target.
“The expectation for 2024, in particular, bothers me,” said Serra in a live broadcast by Bradesco Asset Management. “We are unanchored from the center of the goal. The BC has to maintain a very cautious stance a few quarters ahead, remain vigilant.”
Serra said that the market is “eager” to see the drop in inflation, as it expects interest rate drops in the first half of next year – but that it is “challenging to imagine such a scenario” with inflation above the target.
The comments provoked an adjustment in the Brazilian markets, in a detached movement of the international markets. Interest rate futures, which had been operating in retraction recently, registered a significant increase. The DI maturing in January 2024 was once again above 13%.
Interest rates on the rise, stocks on the decline: the stick made the Ibovespa fall by more than 2%.
“The market’s interpretation is that interest rates will stay high for longer,” said economist Leonardo Costa, from ASA Investments. “The reduction movement, foreseen for the first half, will depend on the numbers of the expected retraction in economic activity and the decline in services inflation.”
One factor of uncertainty is fiscal policy. “By the comments, the BC wants to demonstrate that it will act independently, anticipating a possible lack of control in public spending in the next government,” commented a manager.
The Brazilian Central Bank is not the only one dealing with above-target inflation. Across the world, central banks are in a similar situation, a reflection of the pandemic, increased public spending and the war in Ukraine. The fear, as expressed in the statements by Campos Neto and Serra, is to lose the anchor for the coming years.
The BC did not meet the target in 2021 and it is taken for granted that it will not meet it in 2022, despite the drop in inflation caused by tax cuts.
The center of the target for this year is 3.5%, with a tolerance of up to 5%. According to BC’s Focus bulletin, analysts expect the index to end the year at 6.61%.
For the coming years, a deceleration of price adjustments is expected. Still, economists are forecasting above-target rates in 2023 and 2024. For 2023, the BC’s center target is 3.25%, but the median of expectations indicates a rise of 5.27%. In 2024, the target is 3%, and the market projects 3.43%.
“In the past, the BC was slow to react to the rise in prices, but now interest rates are in line with the downward trajectory of inflation,” commented Tomás Awad, CIO of 3R Investimentos. “An 11.25% Selic, as expected by the market at the end of next year, is a high rate, with real interest rates above 5%.”
The next Copom meeting will take place on September 20 and 21. The majority bets are that the Selic will be kept at 13.75%.