Copom must maintain its strategy and increase Selic by 1.5 points; Analysts differ in the following stages


The final decision for 2021 will be announced by the Monetary Policy Committee (Copom) next Wednesday (8), resulting in an almost unanimous consensus for a 1.5 percentage point increase in Selic, closing 2021 at 9.25% per year .

If, on the one hand, current inflation remains under strong pressure, on the other hand, activity loses its vigor sooner than expected, which indicates that in 2022 it will be very difficult to pass on the increase in costs. on the consumer, which in principle may indicate the need for a slower pace of monetary tightening. At the same time, abroad, commodity prices are showing signs of easing, with the prospect of a less expansive global monetary policy.

So, in addition to next Wednesday’s decision, investors will follow the next steps for the central bank, which is expected to provide a statement accompanied by its decision with more guidance on its inflation outlook, focusing on the horizon. prices for 2023.

The latest version of Focus Report, released on Monday (6), showed that the forecast for Selic in December 2022 is 11.25%. The forecast for 2023 has risen to 8%, down from 7.75% last week and down from 7.50% four weeks ago. So, as Levante Ideias de Investimentos explains, investors will expect higher interest rates if they last much longer than expected.

As for the IPCA, the forecast for 2021 rose to 10.18% from 9.33% 4 weeks ago, while going from 4.63% to 5.02% for next year and from 3, 27% to 3.50% for 2023.

Meanwhile, the performance outlook for the economy has also deteriorated. Estimates of GDP growth in 2021 have been lowered to 4.71%, from 4.93% four weeks ago. This is not the only reduction. The forecast for 2022 is down to 0.51% from 1% four weeks ago. Even the GDP forecast for 2023 has slipped a bit. Forecasts now point to growth of 1.95%, just under 2%.

For Levante’s team, monetary policy appears to be “lagging behind” the behavior of inflation and the real economy. Analysts note that due to the pandemic, the Bank of British Columbia has kept interest rates at 2% per annum for several months, as well as the use of Brazil’s “forward guidance” tool. This may have prevented the economy from further declining due to the pandemic, but it also appears to have dampened inflation expectations.

The situation has been exacerbated by soaring commodity and oil prices, and water shortages driving up food prices. In other words, given only inflation rates, which should remain above the target ceiling in 2022, Copom must continue its “unpleasant” task of raising interest rates and tightening monetary policy.

However, if only the expected behavior of the real economy is observed, this may lead to a loosening of monetary policy to contain the expected slowdown in GDP. Particularly because a weak economy can draw energy from inflation. Thus, economic activity may slow down before monetary policy takes effect. This time, the distortion puts Copom in a dilemma, which will probably not begin to be resolved until 2022, ”Levante assesses.

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But for British Columbia, interest in prices should remain paramount.

In this scenario, economists at Credit Suisse have revised upward their forecast for Selic at the end of the cycle, and revised their rate forecast from 11.5% to 12.25% at the end of next year.

“We maintain our expectation that Copom will raise the Selic benchmark rate by 1.5 points to 9.25% at the next meeting on December 8, and we are awaiting another adjustment of the same magnitude (1.5 points) in February 2022, given that the inflationary process remains unfavorable, focusing on not fixing inflation expectations
for the years 2023 and 2024 ”, according to their assessment.

Swiss banking economists Solange Srour and Lucas Villila expect the Selic index to increase by 1.5 points in February, 1 point in March and 0.5 point in May 2022, compared to the previous forecast of 1 point in February, 0.75 point in March and 0.5 point in May. .

Economists note that the committee will likely continue to stress that, in its baseline scenario, risk factors stay both ways. On the one hand, a possible reversal of the recent surge in international commodity prices in local currency could lead to a lower inflation trajectory.

At this point, the emergence of the new variant of the coronavirus (Omicron) will likely initially be viewed by the central bank and part of the market as deflation. However, on the other hand, financial uncertainty remains, which should remain in the balance of risks, confirming that these issues were responsible for part of the release of inflation expectations for 2023 and 2024.

For Solange and Vilela, Copom is probably saying that despite the deterioration of the risk balance and an increase in its inflation and market expectations, a tightening pace of 1.5 percentage points remains the most appropriate to ensure convergence of inflation throughout the year. appropriate horizon. They still expect the central bank to continue to assert that 2022 has even more leverage in the monetary policy decision, but in the coming months 2023 may gain more leverage.

No change of strategy

XP notes in a report that in the midst of a murky data scenario, Copom will make few changes to its strategy. It will make the indicated increase of 1.5 points, and it will continue to report “another adjustment of the same size” for February, as assessed by the economic analysis team.

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So the baseline scenario for home economists is a 1.50 point Selic hike in December and February and a final 0.75 point hike in March, bringing Selic’s interest rate to 11.50%. .

Home economists have also come up with alternative scenarios. A more difficult decision could be to step up the pace, given the rise in inflation expectations, especially for 2023. In this case, the Copom will rise by 1.75%, leaving the doors more open for the next meeting.

Another, less severe possibility is to indicate that the Copom is less affected by inflation 2022 and will focus more on 2023. In this case, it would reflect this sentence in the statement: inflation for targets on the horizon relevant, which includes calendar years 2022 and 2023. entered “mostly” before 2023.

“Given the known lags with which monetary policy works, the CB would naturally return to the relevant horizon. But, by historical standards, it’s too early (usually at the start of the year). In our opinion, this would be a sign of unnecessary adjustment at a time when inflation expectations are rising, ”they said.

Joao Lille, economist at Rio Bravo, in turn, in addition to the increases of 1.5 points during the Wednesday-February meeting, bringing the rate to 10.75%, and expecting a further increase of 1 point in March, which brings Cilic to 11.75%, and remain at that level until the end of 2022. “The committee should highlight widespread inflation and signal that price increases are no longer essentially temporary. The focus will also be on inflation expectations, in light of weaker economic growth expectations.

For Newton Rosa, chief economist at SulAmérica Investimentos, the Copom must strengthen its determination to move forward in the territory of contraction and they expect, in addition to a 1.5 point increase from Selic on Wednesday, two more increases, of 1.5 points in February and 1.25 in March, to drop to 12%. The economist considers that increases are necessary to ensure that inflation converges with targets over the relevant monetary policy horizon, which includes both 2022 and 2023.

So while the view that Copom will keep pace with monetary tightening at its meeting on Wednesday and signal a similarly large increase for February is all but seen as unanimous, British Columbia’s next steps are still being considered. as uncertain, dependent on continued price increases. Higher interest rates are on the radar, but their magnitude in a weaker business scenario leads to divergent views among market analysts.

Analyst at Rico Corretora teaches practical tools to systematically profit from the financial market. Join for free.

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