What Will the Selic Rate Be at the End of the Easing Cycle?
By raising aggregate demand, and hence the neutral interest rate, expansionary fiscal policy reduces the power of monetary policy. In 2023, the central government generated a primary deficit of R$ 230 billion, but if that result is harmonized with that determined by the Central Bank, which does not consider the resources from the PIS/PASEP contributions to be primary revenues, the deficit amounted to R$ 255.6 billion, or 2.4% of GDP.
In 2024, there will be a new spending increase (2.5% in real terms, according to the fiscal framework), with few ways to boost revenues, making the value of the new primary deficit uncertain. Although this year, fiscal policy should tend to be less expansionary than in 2023, this will be counteracted by a less restrictive monetary policy, according to the Central Bank’s forward guidance of cuts of 50 basis points at each COPOM meeting. At present, the Focus survey indicates the SELIC rate will fall to 9% at the end of the cycle, but with the expectation of inflation above the target.
Based on the Central Bank’s estimate of the GDP gap and assuming a neutral interest rate of 4.5%, we show that the implicit inflation target closely follows the Focus survey, which indicates inflation will be above the target in 2024. In other words, with a neutral rate of 4.5%, if the Central Bank seeks to anchor expectations to the target, it would have to stop the easing cycle with the SELIC rate above 9%. Indeed, based on the uncertainty regarding fiscal policy, a conservative Central Bank, whose objective is to anchor expectations to the target, should stop the easing cycle above 9%. But we are far from sure this will be the decision in light of the Bank’s recent stance.
Now read on...
Register to sample a report