Inflation frightens and puts pressure on Copom for new interest rate increases – 06/10/2021 – Market

The surprise with high inflation in recent months increased pressure on the Central Bank, which will set the new Selic level (basic interest rate) next Wednesday (15).

According to economists, the trend is for the BC to maintain the pace of interest rate increases, but the rate should rise further throughout the year.

The concern with the rise in prices is starting to be noticed in the forecasts for basic interest rates in 2021. In the BC’s Focus Bulletin, the estimate a month ago was for a Selic of 5.5%. In the last bulletin, the forecast of the economists consulted rose to 5.75% per year, a number that should rise in the next survey, which will take into account inflation for May above expectations.

This Thursday (10), Itaú revised the Selic estimates for the end of the year. Before, interest of 5.5% per year was expected, now the expectation is 6%. The bank points out that higher interest rates could bring the IPCA closer to the target next year.

The pressure of electricity made inflation accelerate in May, by the IPCA (National Consumer Price Index – Broad). The indicator rose 0.83% — the highest result for May since 1996. In the 12-month period, the increase was 8.06% (above the ceiling of the target, of 5.25% for this year).

Market expectations for this year’s inflation rose from 5.31% a week ago to 5.44%, according to the latest Focus Bulletin.​

To try to contain the rise in prices, the Copom (Monetary Policy Committee) raised the interest rate in May by 0.75 percentage points, to 3.50% per year. At the time, the BC also signaled that it would make a new high, in the same magnitude, in June, to 4.25%.

The institution also spoke of a “partial normalization of monetary stimulus” in the coming months, so that the rate would still remain at a level low enough to stimulate the economy.

Economist and researcher at FGV Ibre (Brazilian Institute of Economics of the Getulio Vargas Foundation) José Júlio Senna says that the pressure for the BC to act firmly has existed for a long time, due to the rapid deterioration of the inflationary scenario.

The fact that the starting point of the new cycle of high interest rates was very low, at 2% per year, also weighs heavily. “The BC’s life would have been a little easier if the starting point was 3%, for example,” he says.

Senna, who was also a director of the Central Bank, estimates, however, that the pace of 0.75 percentage points of increase has been adequate, even with greater pressure from inflation due to the recent results of the IPCA.

“The practice of announcing in advance the size of the next adjustment should continue at next week’s meeting. To the extent that this strategy actually remains, the monetary policy adjustment already seems to me to be quite substantial and it may not be necessary to accelerate the pace. “

For economist Zeina Latif, the recent result of inflation should not weigh on the decision itself, as it would make no sense for the BC to react to a short-term signal. She assesses that the Central Bank should maintain its diagnosis, also taking into account that the dollar has changed its level, which could lead to an improvement in the projections.

“I believe the BC should keep the speech calm, perhaps leaving the door open for a further increase of 0.75, but without any shifts in the speech,” she says. “This does not mean, however, that the result of inflation does not bring worrying elements that need to be monitored.”

Necton’s chief economist, André Perfeito, says that the most important thing now is the total adjustment and a sign that the BC will take the interest rate from the incentive field to the neutral field.

“Inflation really came up high and this generates discomfort in order to understand the dynamics of the tightening to be made by the monetary authority”, he says.

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