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Analysis: Market defies Central Bank's signal of partial normalization

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The economic analysts consulted in the Central Bank's Focus survey are defying the signaling of the Monetary Policy Committee (Copom) of a partial normalization of interest rates.

The Focus projection for the Selic policy rate target at the end of the year rose to 5% last week from 4.5%. Valor had already captured this tendency of the market to foresee stronger increases in interest rates in a survey recently published.

It is a higher increase than the one apparently signaled by the Copom. Last week's minutes says that, with the 75 basis points increase, to 2.75% from 2%, the committee decided to "start a process of partial normalization by reducing the extraordinary degree of monetary stimulus." Withdrawing the extraordinary stimulus would mean bringing interest rates closer to the 4.25% prevailing before the pandemic.

However, some analysts argue that in order to have the same degree of stimulus today as before the pandemic - stripping out the extraordinary part - the Central Bank must raise interest rates, in nominal terms, to a higher percentage than that.

Today, projected inflation for the coming 12 months is at 4.2%, while a year ago it was around 3.5%. Thus, it would take a somewhat stronger dose of nominal interest to have the same real interest rate.

Others argue that the degree of stimulus comes from the difference between the current interest rate and the natural interest rate. Over the past year, the natural rate has probably increased, with the worsening of the Brazil risk caused by the government's fiscal and political fragility.

But, at least for now, there is no sign that the Central Bank has changed its view on what represents an extraordinary degree before and after the pandemic. It's necessary to check the Copom minutes and the Inflation Report, which will be released this Tuesday and on Thursday, respectively.

The Copom detailed what it considers an extraordinary monetary stimulus in the minutes of its January meeting, when the subject first came up in the arguments of some of...

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