Where is the Selic rate headed? Statement gives room to increase cuts to 0.50 pp, say experts – Money Times

The Monetary Policy Committee (Copom) embraced market expectations and raised the Selic rate to 10.75% per year, at yesterday's meeting, 18th.

According to analyses, the directors of Banco Central (BC) opted for a more modest increase of 0.25 percentage points (pp), but adopted a more hawkish (stand).

This time, Copom highlighted that there was a reassessment of the gap towards the positive side. “The set of indicators of economic activity and the labor market has shown greater dynamism than expected,” they say in the statement.

Regarding the inflationstated that the IPCA full as well as measures of underlying inflation were above target in the most recent releases.

Will Copom increase the Selic rate hikes?

The partner of 051 CapitalFlávio Aragão, says that the tone ““very tough” in the statement gives room for the market to put pressure on the BC, in a second moment, to increase the rate of increase to 0,50 p.p. “O our Central Bank always leaves these gaps.”

According to Aragão, in an interview with Money Timesdecisions about the future of monetary policy are being made by pressure placed within the autarchy. “(The BC) is over having to increase the Selic rate, because he talked too much, and now the statement tries to show that it was much tougher than expected. Depending on the data, it will have to give in to market pressure to ask for 0.50 pp at the next meeting.”

“It is a Banco Central clearly independent of Brasilia, but dependent on Faria Lima, who gives in to his desires. Virou ‘Fla x Flu’”, completa.

On the other hand, the economist of the Rio BravoJosé Alfaix, states that the statement was “mless polysemic” than the last meeting and reinforced the commitment of the municipality to monetary policy.

“Unlike the last one, which the market expected to be tougher, and it clearly came that way. I think it was very good,” he says.

Also speaking to the newsroom, Alfaix said that the Central Bank made it “very clear” that the scenario had deteriorated, with a worse balance of risks and greater challenges.

Why wouldn't it be necessary to increase the cuts to 0.50 pp?

The partner at 051 Capital — who, by the way, did not think it was trivial that Copom would raise interest rates again — says that The government's fiscal boost seen in the first six months of this year is unlikely to be repeated in the second half of the year, nor in 2025.

This, according to him, would already reduce fiscal pressure and give Copom space to “wait” to make the next decisions.

“Raising the Selic rate by 1.50 pp takes all the potential savings from fiscal framework. It is not possible to demand a balance from the government, if the Central Bank increases interest rates by 1.50 pp, with inflation at 4%”, he states.

'0.25 pp will not quell the Central Bank's concerns'

The Rio Bravo Economist also states that communication ppaves the way for higher increases by the end of the year, but sees the move as necessary. “Even though there is no guidancethey made it very clear that the scenario had deteriorated.”

“0.25 pp will not keep the Central Bank’s concerns at bay in the short term. To anchor expectations and appreciate the currency, more abrupt movements are needed,” he says, highlighting that such measures should “make the path ahead less costly.”

Alfaix highlights that interest rates were already at a restrictive level, but were not materializing in activity. “We see GDP growing above projections, the IBC-BR falling less than expected, and services and retail very strong as well. In practice, it is not having an effect on activity”, he states.

According to him, part of this is linked to the fiscal situation. “It is expected that there will be less momentum in the second half of the year, but depending on the fiscal situation to adjust is a somewhat risky bet. The question is always how much the government’s projections are compatible with reality.”

Furthermore, Alfaix highlights that the inflationary argument for raising the Selic rate is also “very good”. “When we look at inflation further ahead, it is increasingly discouraged and there is a danger of a water crisis and the tariff flag rising to red,” he says.