The Central Bank admitted in the minutes of the Copom (Monetary Policy Committee) released this Tuesday (21) that inflation should not converge to the center of the target in 2023, despite the extension of the cycle of high interest rates, and said that the The Selic will need to rise further and remain higher for longer to fight the rise in prices.
The BC inflation target for 2023 is 3.25%, with a margin of 1.5 percentage points (that is, it will be met if it stays between 1.75% and 4.75%), and the monetary authority says now to “bring the projected inflation at 4.0% to around the target in the relevant horizon” (stopping the expression “centre of the target”, as he had already done in the statement released after raising the Selic to 13.25% year).
The Copom says that the IPCA should not converge to the target, even with the continuation of the high interest rate cycle and with the Selic higher for a longer time (and above the reference scenario). Currently, the BC projects an interest rate of 13.25% per year at the end of 2022, 10.0% in 2023 and 7.50% in 2024; under these conditions, inflation would end the respective years at 8.8%, 4.0% and 2.7%, respectively. The market already projects a lower IPCA this year (8.5%), but higher in the following years (4.7% and 3.25%).
“The Committee assesses, based on the projections used and its balance of risks, that the strategy required to bring the projected inflation at 4.0% to around the target in the relevant horizon combines, on the one hand, a terminal interest rate above the used in the reference scenario and, on the other hand, maintenance of the interest rate in a significantly contractionary territory for a longer period than that used in the reference scenario”, says the Copom minutes. “Thus, the strategy of convergence around the target requires a more contractionary interest rate than that used in the baseline scenario for the entire relevant horizon”.
For the reference scenario, the BC projects the exchange rate at US$ 1 = R$ 4.902 and a barrel of oil at US$ 110 at the end of the year, in addition to a yellow tariff flag on electricity bills in December 2022, 2023 and 2024. This projection, however, does not incorporate the impact of the projects that are being voted on in Congress to reduce fuel, electricity and telecommunications prices, such as PLP 18/2022 and the PEC for fuels, and Copom emphasizes that “the uncertainty around its assumptions and projections is currently higher than usual and has grown since the last meeting”.
The Copom minutes say that these measures lower the inflation forecast for 2022, but raise that for the next few years (to a lesser degree). “Tax measures in progress significantly reduce inflation in the current year, although they raise, to a lesser extent, inflation in the relevant horizon of monetary policy”.
Global problems and persistent inflation
The document highlights that the effects of the war in Ukraine and the lockdowns in China “may have long-term consequences and translate into more prolonged inflationary pressures on global production of goods” and also highlights the deterioration of the international scenario with high interest rates. largest worldwide, which will lead to a slowdown in the global economy. “The external environment continued to deteriorate, marked by negative revisions to prospective global growth in an environment of strong and persistent inflationary pressures”.
In Brazil, the Copom minutes say that “consumer inflation remains high, with a rise spread across several components, proving to be more persistent than anticipated”, and that the latest data came above expectations “both in more volatile components and in those more associated with underlying inflation”. “The components that are most sensitive to the economic cycle and monetary policy continue with high inflation and the various measures of underlying inflation accelerated, remaining above the range compatible with meeting the inflation target”.
New high at the next meeting
The Copom assesses that both the short-term inflationary dynamics and its longer projections have deteriorated, despite the current monetary tightening cycle having been “quite intense and timely” (the Selic dropped from 2% in March last year to 13, 25% in about 15 months) and the fact that the sharp rise in interest rates has not yet been fully felt in the economy: “due to monetary policy lags, much of the expected contractionary effect, as well as its impact on current inflation.
Given the current scenario, the committee assessed that maintaining the Selic at 13.25% per year for a longer period of time “would not, at this moment, ensure the convergence of inflation to around the target in the relevant horizon”, so it decided to signal to the market that there will be a further increase of 0.5 or 0.25 percentage point at the next meeting in early August.
“This strategy was considered the most adequate to guarantee the convergence of inflation over the relevant horizon, as well as the anchoring of longer-term expectations”, says the Copom minutes. The document emphasizes that this stance “reflects the monetary tightening already undertaken, reinforces the cautious stance of monetary policy and highlights the uncertainty of the scenario”.
(This report is being updated)