To ensure the convergence of inflation, and keep the Selic rate at an austerity level, in an open letter, the monetary authority (BC) signals the economy with rates in monetary tightening for a longer period

Understanding what the Central Bank (BC) wants for the Selic rate issue in the coming quarters, keeping the economy's basic rate at restricted levels, is the expectation of Finance Minister Fernando Haddad, since the goal is to zero the deficit in beginning of 2024.

In divergence, the market, which passes day, another also in the hope that the BC will start cutting the Selic rate, which is at the highest level since 2016, 13,75%. However, last Tuesday (10), the monetary authority sent a message to Haddad. In Carta Aberta, the Selic rate will remain high for even longer. And the market wanted that already in the first quarter there could be some reduction.

The BC explained that it was the maintenance of rates, in monetary tightening, that ensured that inflation ended 2022 above the target ceiling, at 5,75%. Market experts still project that the Monetary Policy Committee (Copom) may adjust interest rates, despite the message. However, the body's message is clear, “according to the Communiqué and the Minutes of its most recent meeting, the Committee will remain vigilant, assessing whether the strategy of maintaining the basic interest rate for a sufficiently prolonged period will be able to ensure the convergence of inflation.

The Bank speaks of the other reasons, in full, “i. Inertia from the previous year's inflation; ii. rise in prices of commodities, in particular oil; iii. imbalances between demand and supply of inputs and bottlenecks in global production chains; iv. food price shocks resulting from climate issues; and, v. resumption of demand for services and employment, driven by the sharp decline in the number of cases of Covid-19 and the consequent increase in mobility.

The monetary authority also pointed out that the estimates presented in the Open Letter explaining inflation above the upper limit of the target tolerance interval in 2022 are “approximations built on the basis of models and, therefore, are subject to the uncertainties inherent in the modeling and estimation process. ”, the result of “climate anomalies”, declared the Central Bank.

The Letter has a series of infographics and tables that depict components, inflation itself, decomposition, rate deviation, indices, oil prices, among others, such as electricity tariff flags and data from Caged, in the twelve months of 2022, and also presents the evolution of inflation expectations from the Focus survey for the period 2023-2025.

Roberto de Oliveira Campos Neto, president of BC, signed the Charter.

Hardened tone and far horizon

In a speech in which the impacts of fiscal risk are not present, investors, even with other demands, know that keeping the Selic rate at 13,75% for longer is the way to ensure convergence. And if there is someone waiting for interest review, what is seen is a residual increase.

Only after September 2023 is there a residual probability that the Selic rate will drop, that is, in December, it will end the year at around 12,25%. It is a stability that is projected for a long period.