With a low inflation, the Brazilian financial market awaits its last cut in the benchmark interest rate—the Selic—in the current cycle of reductions, to be decided on this Wednesday (May 16). The third meeting of the year of the Central Bank’s Monetary Policy Committee, or Copom, is set to start tomorrow (15), and to end the following day, when the Selic rate is slated to be unveiled.
In March, the Copom cut the Selic for the 12th consecutive time, from 6.75% to 6.5% a year—the lowest since 1986, the beginning of this time series at the Central Bank. The benchmark interest rate is used in negotiations for government bonds under the Special System of Custody and Liquidation—as Selic is referred to in full—and works as a gauge for all other interest rates in the economy. Through the reduction in this rate, credit tends to become cheaper, as production and consumption are stimulated. To trim the Selic rate, the monetary authority must make sure prices are under control and not at risk of surging.
At the latest Copom assembly, the Central Bank signaled another cut in the Selic rate—the last one—in May. Senior economist from Tendências Consultoria, Silvio Campos Neto believes that the Selic rate will face another decrease of 0.25 percentage points in this meeting, as indicated by the Central Bank in March. “We still expect another 0.25 percentage-point drop, which should be the last one in the current landscape. Things are still comfortable inflation-wise,” Campos noted.
Campos mentioned that the inflation index stands at a low level, with reductions spread across sectors and a “solid slowdown” in services. “Furthermore, expectations are still well anchored, in fact below targets, for both this year and 2019. This creates the conditions for the Central Bank to confirm its indication it had given in the last meeting, signaling it would make another cut in the meeting in May,” he added.
In setting the Selic rate, the Central Bank aims at the target for the inflation—4.5% this year, with a lower limit of 3% and an upper margin of 6%. For 2019, the target stands at 4.25%, with tolerance range of 2.75%–5.75%. According to a survey conducted by the Central Bank with financial institutions, the inflation is likely to close out 2018 at 3.49% and 2019 at 4.03%.
Last Thursday (10), the Brazilian Institute of Geography and Statistics (IBGE) announced that the National Broad Consumer Price Index (IPCA) reached 0.92% January–April, the lowest rate for the period since the introduction of the Plano Real, in 1994.
In Campos’s view, the recent hike in the US currency—which went up to R$3.60 on Friday (11)—makes an impact on the inflation “slightly weaker than what’s been normally observed,” especially taking into consideration, he added, that recovery has been “slow,” which keeps prices from surging. “The idleness in the economy, especially in the labor market, mitigates the increase [in prices pushed by the surge in the dollar.] This increase does exist, but it’s not enough to change the inflation this year, which is considerably below the target; as for 2019, the inflation is estimated to stand slightly below the target,” he said.
“The exchange rate is always a risk. It may stay high, and also increase even further depending on the political and electoral scenario. The inflation does tend to keep low, however. Of course, an explosion in exchange may have a more considerably impact in the future, but the landscape is quite comfortably for now. The current pressure [from the hike in the dollar] wouldn’t lead the Central Bank to change its mind,” Campos argued.
Órama Investimentos economist Alexandre Espírito Santo also believes that the recent increase in the US currency should not raise the inflation or make the Central Bank give up cutting down interest this month. “The high price of the dollar was caused by very specific reasons. The dollar has been strong in the international market, as a result of a possible change in the policy of the US Central Bank [a likely increase in interest in the US, which draws money to advanced economies, driving financial capital away from emerging countries, like Brazil]. There’s another reason, namely the stress in the Argentine market,” he said, referring to the crisis in the neighboring country. Argentina will probably resort to a loan from the International Monetary Fund (IMF) to settle its financial situation. “Some investors are also leaving [Brazil]—nothing really significant. This intensifies the pressure on the dollar,” he added.
“The inflation has behaved well. I believe that the Selic will slip by 0.25 percentage points, and then the Central Bank will have had enough, as the goal is to bring the inflation closer to the center of the target, which is likely to change early next year,” Espírito Santo said.