Expected expansionary contraction did not materialize
The Central Bank firmly raised the Selic policy interest rate target by 150 basis points, divided into two moves, one in March and another in May. But it did not reap the reassuring effects that many had predicted on the exchange rate and on the interest rates negotiated in the financial market. What happened?
Before the meeting of the Monetary Policy Committee (Copom), 10-year contracts maturing in 2031 were negotiated with interest rates of 8.5% per year. At the end of last week, they were already at 9.1% per year. The exchange rate fell below R$5.50 to the dollar after the Central Bank moved, but then it rose again.
To make a long story short, the financial and monetary conditions are more restrictive now. There has not been the positive effect that many analysts expected from a conservative Central Bank, a kind of expansionary monetary contraction.
This does not mean that the strong monetary tightening by the Central Bank will be in vain. It helps to achieve the monetary policy objective of ensuring that the inflation target is met. According to the minutes of the Central Bank released after the decision, the monetary authority has not bought the thesis defended by some sectors of the market. One may wonder whether, faced by a very weak economy, the Central Bank has overreacted. This will become clear next year if inflation is too slow or if the price paid in terms of economic activity is exaggeratedly high.
Bruno Coutinho, co-founder and CEO of Mar Asset, feels uncomfortable with the common assertions in the market that if the Central Bank moved firmly, the yield curve would become less steep, and in the end, it would reap more favorable financial conditions for the economy.
"If the yield curve is positively sloped, it is because the Central Bank is stimulating the economy," he says. "When the yield curve is less steep, the Central Bank is stimulating less." This is what has happened in recent weeks, as the market began to price a monetary tightening by the Central Bank, and was reinforced by the stronger-than-expected Selic hike.
The monetary stimulus occurs when the Central Bank sets the Selic below the natural rate. Today this natural rate is estimated by the Central Bank at 3% a year in real terms, which in nominal terms is 6.25%, considering an inflation target of 3.25% for 2023. Under these circumstances, the yield curve is positively sloped because, in the long run, everyone expects the Selic to be around the natural rate. Long...
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