The BC Copom decides this Wednesday on the new base interest rate, the Selic. Photo: Marcello Casal Jr / Agência Brasil
The Central Bank’s Monetary Policy Committee (Copom) could step up monetary tightening at the meeting which began on Tuesday (3) and will continue until Wednesday (4). According to the projections of financial institutions collected by the BC, the predominant expectation is a one percentage point hike in the Selic, the base interest rate, which would bring it to 5.25% per annum, the highest level. since November 2019. confirmed, this will be a higher increase than that promoted in the last three meetings, by 0.75 percentage points in each.
A number of factors are driving this upward trend, explains Rachel de Sá, head of the economic department of Rico Investimentos. “The economy is recovering, GDP is returning to pre-pandemic levels and inflation remains at high levels. This prompts British Columbia to step up the pace of rising interest rates. “
Bradesco considers that expectations for economic activity remain favorable. But, according to the bank’s team of economists, the margin for positive surprises appears to be smaller going forward, despite the expected post-pandemic normalization.
The latest projection from the Focus report, a weekly British Columbia survey of financial institutions, shows that the midpoint (median) of GDP growth expectations is 5.3%. This number has been increasing for 15 consecutive weeks.
Inflation favors the Selic hike
Daniel Xavier, senior economist at ABC Brasil bank, says the latest IPCA figures surprised on the upside and provided less favorable details, such as accelerating inflation in the service sector. Inflation projections for 2021 are also on the rise. The midpoint of expectations is 6.79%, after 17 consecutive highs.
“Inflation is expected to post a new high and is expected to reach 6.7% by the end of 2021. It looked like British Columbia had entered the Selic plus adjustment cycle. rapidly, with increases of 0.75 percentage points since March, but this was not the case. sufficient for the scenario of new supply shocks which continue to impact inflation and contaminate expectations, ”quote Inter bank economists in a report.
Rachel, of Rico Investimentos, recalls that there is global inflationary pressure, especially on the producer side, which is reflected in an increase in indices such as the IGP-M, which over the 12 months ended in July has accumulated an increase of 33.83%.
XP Investimentos analysts recall that, at the last Copom meeting, commodity prices, measured in reais, seemed to start a downward trend. According to them, this has not been confirmed and the real has devalued again.
Climate issues are also putting pressure on inflation. On the one hand, the stronger cold this year should have an impact on the production of fruits and vegetables, coffee and oranges. On the other hand, the lesser amount of rain in recent months has contributed to the change of tariff flag, which is at the origin of part of the rise in the IPCA, the official inflation, in the last two months.
Tax risk comes to the fore
Fiscal risk, which Inter analysts say has returned to the agenda with the start of discussions on the 2022 budget, is also contributing to the pressure on inflation expectations.
“In addition, demands for increased spending are piling up, such as the proposed increase in the Bolsa Família program, the potential readjustment of civil servants and the new expected increase in spending with the payment of court orders,” they point out. .
Inter economists also specify that, faced with this scenario, they have reversed measures to relax the expenditure ceiling, by excluding expenditure from the ceiling, which increases fiscal risk. “Proposals that go against the grain tend to increase risk aversion and therefore demand higher interest rates in the market.”
But, even with the Selic tending to rise by a percentage point, interest will continue to stimulate the economy, says Xavier of ABC Brasil. Indeed, the Selic will continue below historical levels and at a level below that at which inflation is within the target stipulated by the BC and which keeps GDP growth in line with its growth potential. This rate is estimated at 6.5%.