10% Selic?  Fiscal and external worsening limit interest rate cuts and economists reformulate projections

10% Selic? Fiscal and external worsening limit interest rate cuts and economists reformulate projections


The international scenario with high interest rates in the US and a strong dollar could lead BC to close the cycle of cuts with a rate higher than expected

The perception that the Federal Reserve (Fed, the American central bank) it may take longer to cut the commissions we WE and the new increase in fiscal tension in Brazil, triggered by the change in primary result objectives, already give the market a glimpse of a growing possibility of Central bank be forced to end the monetary easing cycle with a double-digit Selic rate, probably 10%.

Although not a majority, this projection already appears in the scenarios of Citi, XP Investimentos and JPMorgan. AC Pastore & Associados recently increased the estimate from 9.25% to 10%, starting to consider three cuts of 0.25 percentage points in the scenario – including the next Board meeting Monetary Policy Committee (Copom), in May. Market consensus is 9.5% in the Focus and Projeções Broadcast surveys.

Economist Alexandre Schwartsman, a former BC director and AC Pastore consultant, says the combination of a strong economy, fiscal uncertainty and dollar appreciation has limited room to reduce interest rates. He raised his projection for economic expansion this year, from 1.8% to 2.3%.

“We are working with GDP growth above 2% this year, which is above potential and means a further closing of the output gap,” he says. “We also have a complicated tax system with signs that the trajectory of headline outcomes will be worse from now on.”



In the minutes of the November meeting, the Monetary Policy Committee had already raised the tone regarding the importance of fiscal targets, recalls Schwartsman. In an excerpt from the paper, the panel acknowledged an increase in uncertainty around these targets, resulting in an increase in the risk premium.

Added to these internal pressures is the international scenario. Over the past two weeks, following the announcement of inflation to American consumers in March, there has been a sharp reassessment of market bets on the trajectory of the country’s interest rates, leading to indications of up to six cuts this year – and, now, suggest something between one and two, if any. The dollar rose nearly 2% and consolidated above the R$5 mark, signaling pressure on domestic inflation.

“There was a more favorable scenario in the last half of last year that opened space for a larger decline in interest rates, but the situation has reversed,” says XP Investimentos chief economist Caio Megale. The broker raised the Selic rate projection at the end of the cycle, from 9% to 10%.

Megale says that, in the external context, commodity prices have risen again, the Federal Reserve (Fed, the American central bank) has begun to signal that it will not cut short-term interest rates and emerging currencies have depreciated. All this could force Brazil, which already has its own internal problems, to slow down.

With the job market hot and inflation slowly declining, the expectation was that the Fed would make between six and seven cuts, with the first in March. Now there are only one or two cuts, the first of which not before September. There was great expectation that the reduction in American interest rates would begin to release a volume of 6 trillion dollars, intended for short-term bonds in the United States, to new markets, such as emerging ones.

“The recent stability in inflation will keep interest rates elevated for longer,” says Ryan Sweet, chief U.S. economist at Oxford Economics. In line with much of the market, the consultancy recently changed its expectations for an initial US interest rate cut from June to September.

In this scenario, last week the Brazilian Central Bank sent messages that led part of the market to believe that the pace could be halved at the next meeting of the Monetary Policy Committee (Copom), on May 7 and 8.

In this case, stronger-than-expected demand suggests higher inflation in the short term and the expansionary stance of fiscal policy is confirmed.

“Public spending continues to grow. Other programs continue and every day we see a new program starting to boost the economy”, says Caio Megale. According to him, in the first quarter revenues were not enough to balance the public finances, which makes the fiscal scenario even more uncertain.

XP raised projections for GDP – from 2% to 2.2% – and for inflation in 2024 – from 3.5% to 3.7%. The house, however, maintained its estimate for 2025 inflation at 4%. “The adjustment of the interest rate projection was necessary to maintain the same inflation scenario,” explains Megale.

Counterpoint

For Dalton Gardimam, chief economist at Ágora Investimentos, a double-digit Selic at the end of the cycle is possible, but not probable. He recently increased the projection of terminal interest rates from 9.5% to 9.75% and estimates that the tension of recent weeks is tending to ease. “I don’t think it remembers the great crises of the past,” he says.

The change in the primary outcome target for 2025 triggered a process of unanchoring expectations which triggered an overshooting (overreaction) in the market regarding the impact on inflation, the analyst says. But he emphasizes that, although the change is serious, the spending containment rules foreseen by the fiscal framework continue to apply. “It still doesn’t seem to me that the government has done all or nothing,” he says. COLLABORATED BY ALINE BRONZATI

Source: Terra

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