After Copom minutes, economists are divided on the end of the cycle of high interest rates

Concerns about inflation continue, but with attention to the “delayed” effects of an interest rate hike. With this scenario on their radar, part of the market read the minutes of the Copom (Monetary Policy Committee), released this Tuesday (10), as a more “dovish” stance on the part of the Central Bank (less restrictive, signaling lower price hikes). interest) and assessment is that the document brought a significantly different balance of risks for inflation: instead of asymmetrical upwards, now more neutral.

Analysts also highlighted that the BC left open both the decision of the next Copom meeting (although it reinforced the signal that there will be a new high, with less intensity) and the date when the current cycle of interest rate hikes will finally end.

The Copom decided last Wednesday (4th) to raise the Selic rate for the tenth consecutive time, from 11.75% to 12.75% per year, and said that “it foresees an extension of the cycle with a minor adjustment as likely” . The increase of 10.75 percentage points in just over a year is already the most intense monetary tightening cycle since 1999.

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An analysis by XP Macro highlights that the Copom “observed a further deterioration both in the short-term inflationary dynamics and in the long-term projections” and that it was caused by both external and internal factors. In addition, the committee assessed that “inflationary pressures have intensified and are characterized by both persistently high demand for goods (eg in the US economy) and supply shocks”.

But XP Macro saw “a ‘dovish’ part of the description of the drivers of inflation” in economic activity. “The Copom pointed out the risk of a more accentuated deceleration ahead, due to tighter financial conditions both in Brazil and abroad”, and that the committee highlighted that an “unusual uncertainty” requires “additional caution in its actions”. “The Copom described an additional increase of lesser magnitude at the next meeting as ‘probable’. But it didn’t seem to commit much to this signaling, in our view”.

Étore Sanchez, chief economist at Ativa Investimentos, also read the minutes as “dovish”. “In section C, in which the members deposit discussions on the conduct of monetary policy, the arguments used lead to a marginally more ‘dovish’ perception. Starting with paragraph 13, in which they classify ‘the current monetary tightening cycle (as) quite intense and timely and that, due to lags in monetary policy, a large part of the expected contractionary effect, as well as its impact on the current inflation’.”

The chief economist at Ativa points out that “the authority’s own conditional inflation expectations should reflect this ‘satisfactory’ lagged impact of monetary policy, which does not occur, given that 2023 is above the target target”. “In paragraph 16, members emphasize that the strategy of indicating ‘an extension of the cycle, with a minor adjustment at the next meeting’ as ‘adequate to ensure the convergence of inflation over the relevant horizon, as well as the anchoring of expectations for longer terms’, which is also not reflected in expectations”.

No more asymmetrical risks?

Goldman Sachs’ analysis of the minutes says that “the Copom continues on the offensive in the calibration of monetary policy”, mainly due to the further deterioration of inflation expectations and inflation projections for 2022 and 2023, “but everything has a limit”.

The bank says that the post-meeting communiqué and the minutes “show a Central Bank that is vigilant but balanced and ready to validate a Selic rate above 13%” and at the same time “cautious about the next policy moves”. [monetária]given the already clearly tight monetary stance, the lagged effects of the recent highs, increased uncertainty around the macro scenario, the possibility that commodity prices in local currency could signify a partial reversal, and the fact that the The balance of risks for inflation is no longer judged to be skewed upwards”.

“In short, the characterization of the balance of risks for inflation has changed significantly: it has become more balanced/neutral rather than skewed upwards”, ponders the Goldman Sachs report. The bank highlights the bullish and bearish risks pointed out by the Copom for the inflationary scenario (and inflation expectations): greater persistence of global inflationary pressures and increase in the risk premium due to uncertainty about the country’s future fiscal framework, on the bullish side, and a possible reversal – albeit partial – of the increase in commodity prices (in reais) and a deeper deceleration of economic activity, on the bearish side.

The bank points out that “we are already entering a stage of fine-tuning the final cycle”, but “the minutes do not explicitly or implicitly mention that a probable June high (of lesser magnitude) could be the end of the cycle”, as Copom stopped saying that the interest rate cycle that supports its scenario (Selic rising to 13.25% in 2022) is enough for inflation to converge to levels around the target in the relevant horizon.

In line with expectations

Bradesco’s Department of Economic Research and Studies (Depec) said that the Copom minutes reinforced the signal of the communiqué released shortly after the meeting. “In the document released today, the Central Bank pointed out that it considers it appropriate for the monetary tightening cycle to continue advancing in contractionary territory, leaving the door open for further interest rate adjustments ahead.”

“The report also brought up discussions about the lag of monetary policy, the downside risks to economic activity arising from the tightening of financial conditions and the divergence between the projections of its reference scenario and the market projections, which have pointed to higher inflation”, states the Depec text. “In the short term, data up to the next meeting will be crucial to determine the pace of the Selic rise.”

For Luca Mercadante, economist at Rio Bravo, the minutes maintained the Copom’s “tough tone” with inflation, “emphasizing the worsening in the price trajectory in relation to what was anticipated and a great concern to re-anchor expectations in the economy”. “Two aspects of the text stand out: the comment in relation to the fiscal that hardens, once again, the tone of the BC around fiscal policy and the discussion about the next steps, which admits the need for an extension of the cycle given the expectations”.

Projections for the Selic: different scenarios

After the Copom minutes, XP Macro maintained its projection of a “terminal” Selic rate at 13.75% per year, which can either be achieved with a final increase of 1 percentage point at the June meeting or two increases of 0, 5 point in the next two meetings.

Ativa Investimentos, in turn, reaffirms the expectation that the BC should raise the Selic by 0.5 point in June and interrupt the upward cycle.

Goldman Sachs and Depec also project a “terminal” Selic of 13.25% per year at the next meeting. But the American bank does not rule out a 0.75 point increase in June and/or another increase at the August meeting (and believes that the Copom will wait until the second quarter of 2023 to start reducing interest rates).

Itaú, in turn, stressed that the Copom minutes reinforce the main messages of last week’s statement: a new Selic rate hike is likely at the next meeting, but at a slower pace, given the stage of the cycle and the need for caution in a scenario perceived as quite uncertain.

“We expect a 0.50 point increase at the June meeting and, given the bland inflation forecasts considered by the committee, we expect another 0.50 point increase at the August meeting. Thus, we maintain our view of the Selic rate at 13.75% per year at the end of the current cycle of monetary tightening”, assess the bank’s economists.

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