January 20, 2022

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Copom must maintain strategy and raise Selic by 1.5 points; Analysts differ in the following steps

The final decision for 2021 will be announced by the Monetary Policy Committee (Copom) next Wednesday (8), resulting in a near-unanimous consensus for a 1.5 percentage point increase in Selic, ending 2021 at 9.25% annually.

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

Thus, in addition to next Wednesday’s decision, investors will monitor the central bank’s next steps, which should provide a statement along with its decision with more indications about its inflation outlook, focusing on the price horizon for 2023.

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 rose to 8%, down from 7.75% last week and up from 7.50% four weeks ago. Thus, as explained by Levante Ideias de Investimentos, investors will expect higher interest rates if they continue for much longer than previously expected.

As for the IPCA, the forecast for 2021 has risen to 10.18% from 9.33% 4 weeks ago, while rising from 4.63% to 5.02% for next year and from 3.27% to 3.50% for 2023.

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

For the Levante team, monetary policy appears to be “late” in relation to 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% annually for several months, as well as resorting to 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 picture 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. Not least because a weak economy can draw energy from inflation. Thus, economic activity can slow down before monetary policy takes effect. This time distortion puts Copom in a dilemma, which will likely begin to be resolved only in 2022”, assesses Levante.

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

In this scenario, the economists at Credit Suisse revised upwards their forecasts 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 maintained our expectation that Copom will raise the Selic reference rate by 1.5 points, to 9.25% at the next meeting on December 8, and we expect another adjustment of the same size (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 bank economists Solange Srour and Lucas Villila expect the Selic index to rise 1.5 points in February, 1 point in March and 0.5 points in May 2022, from the previous forecast of 1 point in February, 0.75 points in March and 0.5 points in May . .

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

At this point, the emergence of the new coronavirus variant (Omicron) is likely initially to be seen 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 unfixing of inflation expectations for 2023 and 2024.

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

No changes in 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 1.5 points, and it will continue to signal “another adjustment of the same size” for February, as assessed by the Economic Analysis Team.

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Thus, the baseline scenario for economists at home is a 1.50 point increase in Selic in December and February and a final 0.75 point increase in March, bringing the Selic interest rate to 11.50%.

Home economists also put forward alternative scenarios. A tougher decision may be to speed up the pace, given rising inflation expectations, especially for 2023. In this case, Copom will raise 1.75%, leaving the doors more open for the next meeting.

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

“Given the known lags with which monetary policy operates, BC would naturally roll over on the relevant horizon. But, by historical standards, that is too early (usually early in the year). In our opinion, this would be an unnecessary sign of adjustment, in A time when inflation expectations are rising,” they estimated.

Joao Lille, an economist in Rio Bravo, in turn, in addition to the 1.5 point increases at the Wednesday-February meeting, raising the rate to 10.75%, and expecting another 1 point increase in March, which leads to Cilic at 11.75%, and staying at this level until the end 2022. “The committee should highlight widespread inflation and report that price hikes are no longer essentially temporary. The focus will also be on inflation expectations, in light of lower economic growth expectations.

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

Thus, while the view that Copom will follow the pace of monetary tightening at its meeting on Wednesday and signal an increase of the same size for February is practically seen as unanimous, BC’s next steps are still viewed as uncertain, dependent on the continued rise in prices. Higher interest rates are on the radar, but their magnitude in a weaker activity scenario leads to differing views among market analysts.

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