With the maintenance of interest at 13.75% taken for granted at this Copom meeting, President Lula and his allies will examine the text of the communiqué with a magnifying glass in search of a signal to cut interest rates in the coming months, as some market agents have already predict. If the signal does not come, the criticism of high interest rates by the Executive will continue and increases the possibility of a rediscussion of the inflation target for next year.
BC president Roberto Campos Neto, who already understood the new government’s modus operandi, used part of his time speaking to senators last week for an advance explanation of the communiqué: “The words in the Copom communication became the object But we have a pattern that hasn’t changed, used all over the world. Copom’s communication is very technical, and each word makes a lot of difference”.
In the first Copom communiqué under Lula, one of the things that irritated the economic team was the section that included the new government spending rule in the list of risks to the inflationary scenario, which lead the BC to maintain interest rates at the current level.
The exact words were: “The still high uncertainty about the future of the fiscal framework of the country and fiscal stimuli that imply sustaining aggregate demand, partially incorporated into inflation expectations and asset prices”.
After the last meeting, the excerpt was changed to: “The uncertainty about the fiscal framework and its impacts on expectations for the trajectory of public debt”.
President Lula and his surroundings, including in this case the Minister of Finance, Fernando Haddad, publicly expressed that they expected the BC to show more confidence in the new spending rule presented by the Treasury. According to the words of Roberto Campos Neto in the Senate, and in view of the government’s difficulties in Congress, a radical change in the wording of the Copom communiqué should not happen.
Another passage that will be closely examined by the economic team is the one that talks about the time in which the committee intends to keep the interest rate at the current level in order to control inflation. In the last communiqué, in March, the directors talk about an extended period:
“Considering the uncertainty surrounding its scenarios, the Committee remains vigilant, assessing whether the strategy of maintenance of the basic interest rate for an extended period will be able to ensure the convergence of inflation”. In the February communiqué, the text spoke of period “longer than in the baseline scenario“.
Faced with the most likely scenario, that the Central Bank should maintain the same line in this Wednesday’s communiqué, Lula and allies should once again increase pressure on interest rates, and the possibility grows that the CMN (National Monetary Council) will re-discuss the targets of inflation for 2024 and 2025 at the June meeting.
If the BC signals a drop in interest rates still in 2023, it is possible that the CMN restricts itself to establishing the 2026 inflation target in June, without reviewing the targets already established for 2024 and 2025, of 3%, with a tolerance of 1 .5 point up or down (from 1.5% to 4.5%).
In Lula’s political speeches since February, it is high interest rates in Brazil that prevent families from getting out of debt, buying again, and the economy growing again.
During the Senate hearing last week, the president of the Central Bank, Roberto Campos Neto, used his presentation to pass on to senators, the public and the government his analysis that the fault for high interest rates in Brazil is not the Selic, established by the BC, but among other factors, the high volume of directed credit (cheaper, subsidized credit for certain sectors) granted by the government.
“Monetary power is the impact of changes in the basic interest rate. The more earmarked credit, the less power you have. There is no country in the world that has as much earmarked credit as Brazil, with 40%. It’s like half price, or like a clogged tube. This explains why Brazil has to raise interest rates more”, said Campos Neto.
The half-price concept used by him is based on the idea that, if almost half of the credit market has subsidized loans, the rest (such as small entrepreneurs) end up paying more for the interest on their loans.