The Central Bank management took the unanimous decision to maintain the Selic rate at 10.5%. If he had lowered the basic interest rate or voted split, he would have pulled the pin on a grenade strapped to his forehead, which would explode this Thursday and for weeks to come.
The supposed “campista” and “lulista” wings want to calm the turmoil. If this is not the case, the next president of the BC, to be appointed by President Luiz Inácio Lula da Silva, will take office with an ungovernable situation.
Making rice and beans inevitable, BC and the government can organize a counteroffensive. If the supreme lord of money, the US Central Bank, also helps, it might even be possible to reduce the Selic rate this year.
At the moment, the most important thing is to induce a longer-term decline in interest rates in the market and take the dollar out of the fuel level for inflation.
It’s more important than lowering Selic straight away with a knife-edged punch. Yes, this way the government will also pay lower interest to rentiers. It will not be easy.
The BC presents two inflation estimates in the statement announcing its decision on the Selic. In one of them, it estimates that the IPCA will fall to 3.1% in 2025, the target of 3%, in practice.
However, the BC models spit this number almost at the target only if the Selic remains at the current 10.5% as far as the eye can see, until the end of next year, everything else constant.
If the estimate is based on a Selic of 10.5% at the end of this year and 9.5% at the end of 2025 (current projections from “the market”), the IPCA will fall to 3.4% next year.
In the projections from the BC meeting in January, with Selic at 9% at the end of this year and 8.5% at the end of 2025, inflation would fall to 3.2% next year, practically on target.
It’s easy to see how the scenario got worse.
The reader may not like this conversation, but it is with such numbers in mind that the BC management will chew on this tough nut to crack. Any BC leadership, whether out of conviction or mere pragmatism, should act like this in the coming months.
As?
First, keeping the Selic rate high, with no forecast for a cut.
Second, with improvements regarding government accounts, inflation expectations, the dollar and interest rates on the market.
To quote the BC statement: “The Committee reaffirms that a credible fiscal policy committed to debt sustainability contributes to anchoring inflation expectations and reducing risk premiums on financial assets, consequently impacting monetary policy.”
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It is also obvious that there cannot be any worsening in the surrounding area. That is, there must be a prospect of falling interest rates in the US; there can be no sign that the pace of economic activity (GDP, employment) in Brazil affects prices; Energy prices must remain consistent.
It’s the same as usual. Lula 3 must present a new deficit containment plan (“credible fiscal policy”). The BC will have to have a bad reputation for months, unfortunately.
The dollar reached R$5.44. It would be around R$4.93 from November 2023 to March 2024. It rose to R$5.13 in April and May, on average for each month. On average for June, it is R$5.35. Much of the worsening is the effect of high interest rates for longer in the USA. Another part is the result of crazy economic policy conversations in Brazil.
The dollar has to come out of these heights, so as not to inject more inflation into the economy. “Basic” interest rates in the market, with a term longer than two years, are between 1 point and 1.6 points above the level they were in August 2023, when the BC began to cut the Selic. Of course, it’s not enough to just cut the Selic.
Given the mad chaos, confidence in the Central Bank and, even more so, in economic policy has fallen a lot. Let’s waste time taking tranquilizers. But the stress can pass, if government actions and reality are also more palatable.
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