Analysis: Market wonders how high Central Bank can raise rates
The financial market is wondering up to what percentage the Central Bank’s Monetary Policy Committee (Copom) can raise the Selic, Brazil’s benchmark interest rate. Many players believe that it should exceed the expected 11.75% per year if the policymakers’ modus operandi so far is any guide.The Copom gives clues about the final rate of the monetary tightening cycle through its projections for inflation in the baseline scenario, its balance of risks and other messages in its statement. The inflation projection in the baseline scenario, in itself, would already demand to take basic interest rates, which Wednesday was raised to 9.25% per year, to more than 11.75% per year.The level of 11.75% per year is a reference because this was the market’s expectation for the cycle of interest rate hikes before the Copom meeting. The consensus of the Central Bank’s Focus bulletin, a survey with economists, was that the target for the Selic rate would reach this level in May 2022 and would start to fall in October, ending the year at 11.25% a year.Assuming this interest rate path, the Copom projects inflation of 4.7% in 2022, well above the center of the target for the year, of 3.5%; and of 3.2% in 2023, a little below the center of the inflation target, of 3.25%.These projections in the baseline scenario, by themselves, would require a monetary tightening greater than 11.75% per year. In the December meeting, the Copom focused on the 2022 and 2023 targets with equal weight. That is, it pursued a weighted target of 3.375%, while the weighted inflation projections stood at 3.95%.In February, the monetary policy horizon will shift again, and the Copom will be 25% focused on the 2022 target and 75% focused on the 2023 target. Thus, the weighted inflation projection would be 3.575%, against a target of 3.275%.Whatever the reference, the inflation projected in the central scenario exceeds the target on the relevant horizon, requiring interest rates above 11.75% per year.Some economic analysts raised eyebrows because the Copom, in Wednesday’s statement, said it may adjust the pace of interest rate hikes to ensure the "convergence" of inflation towards its targets. In the October meeting, the Central Bank said that the steps could be adjusted to ensure the "achievement" of the inflation target.Since the "convergence" of inflation to the target is somewhat softer than the "achievement" of the target, there is some suspicion that the commitment to the horizon at...
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