Signs of economic slowdown are starting to grow and current inflation shows some improvement in its composition, although it remains high. However, an abandonment of the restrictive monetary policy is increasingly distant, since medium-term inflationary expectations have risen strongly, which has created an obstacle to reductions in the country’s basic interest rate, the Selic rate, this year .
In the minutes of the last Copom meeting, which took place in the last week of January, the collegiate maintained the Selic at 13.75%, but did not rule out the possibility of further rate hikes if the disinflation process does not take place as expected.
In the last week, the behavior of the interest market clearly showed the worsening of the economic outlook and the indication that the interest rate could be higher than expected.
According to experts, according to the latest calculations, the Central Bank (BC) believes that a real interest rate between 7% and 8% is necessary to deflate the economy.
The exchange rate also serves as a thermometer. It has remained between R$5.00 and R$5.30 in recent weeks, but volatility jumped significantly from the end of January to the last week, driven by the external market, which began to price higher interest rates in the US .
Inflation target and the Selic rate
To reach the inflation target, the Central Bank uses the basic interest rate, the Selic, as its main instrument. When the Monetary Policy Committee (Copom) raises the basic interest rate, the purpose is to contain the heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. Thus, higher rates can also make it harder for the economy to expand.
In addition to the Selic rate, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses.
When the Copom decreases the Selic, the tendency is for credit to become cheaper, with incentives for production and consumption, reducing control over inflation and stimulating economic activity.
The inflation target defined by the National Monetary Council (CMN) is 3.25% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit is 4.75%.
Source: Valor Econômico and Agência Brasil