Inflation, Monetary Policy and Exchange Rate
At the last COPOM meeting, the Central Bank did what it had announced at the previous meeting, raising the SELIC rate by 1.5 percentage points, to 10.75%. Although it announced that at the next meeting the increase will be smaller, against a backdrop of stubborn inflation and unanchoring of expectations, the Bank made it clear that the terminal rate will not be 11.75%, but rather above 12%.
Although the increase in the differential between the interest rates in Brazil and the United States can prolong for a while the movement that recently took the Real to the environs of R$5.30/US$, the effect on the inflation rate will be small, and should not interfere in the estimate of the SELIC rate at the end of the tightening cycle. The increased power of the presidential chief of staff in relation to the minister of the economy has increased the risk of populist measures (such as the proposed constitutional amendment that would eliminate taxation of fuels, totally contrary to the Fiscal Responsibility Law), and is working to keep the risk premiums high, with reflections on the long end of the yield curve and the exchange rate.
The reaction of the Central Bank has been to “keep the interest rate in substantially restrictive territory,” and although due to the good harvest, GDP in the first quarter this year might expand slightly, given the long lags of monetary policy, a risk exists of recession in the second half of the year.
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