Central Bank signals possible interest rate drop in August 2023

The amount has been the target of criticism by the federal government and businessmen, who claim that the rate is too high for the low level of inflation recorded in recent months. The Central Bank, in turn, argues that maintaining the Selic at this level is necessary to reach the inflation targets, which today are at 3.25%, with a tolerance interval of 1.5 percentage points, up or down. down.

Therefore, with the projection of inflation at 5.06% for 2023, the expectation still remains above the target.

The maintenance of the economy’s basic interest rate at 13.75% is due to the country’s inflationary memory and the need to adapt to the economy’s internal and external conditions. The market’s argument that high interest rates are unfavorable to the economy does not hold true in view of the Central Bank, which claims that “a monetary tightening” in the short term will benefit the economy in the medium and long term.

In the last week, the markets’ expectations fluctuated negatively, not only because of the announcement of the Selic maintenance, but because of the Bacen’s considered “tough measure”, in not signaling a possible fall in August, as expected. The stock exchange even oscillated negatively, at 118 thousand points, after having accelerated in recent weeks, reaching the level of 120 thousand points.

However, after the release of the full minutes, there is a softening of the committee’s announcement. This time, the Copom signaled in more detail the possibility of lower interest rates starting in August of this year, depending on the maintenance of the inflation rate at lower levels.

In August of this year, the Copom meets again to define the economy’s basic interest rates. Even before the release of the full minutes, a lower basic interest rate was already expected in the economy for August. The full document confirms this expectation.

The disclosure of the document diminishes the negative expectations of investors and the future stock exchange operates on the rise and with a preview of inflation released on the same day. Lower inflation reinforces the possibility that the Central Bank will reduce the Selic rate at the next meeting. Copom meetings take place every 45 days.

Update on the Economic Scenario, according to the Copom

On the one hand, the Central Bank states that the external environment remains adverse, with tightening of credit markets in the US. Along with this, the central banks of the main economies remain determined to promote the convergence of inflation rates towards their targets. In these environments, inflation is resilient.

In several countries, inflation is above their targets. This scenario points to a cycle of rising interest rates in several countries around the world and caution in conducting economic policy.

On the other hand, the release of GDP in the first quarter of 2023, which grew by 1.9%, contributes to the possible drop in interest rates in August. Much of the surprise is due to the good agricultural performance

In addition, consumer inflation has recently dropped and contributed significantly to the reduction of the economy’s basic rate. The inflation expectation for 2023 is 5.1%. As for 2024, it is 4.0%.

Some factors stand out for controlling inflation, such as in the external scenario, in which central banks maintain the policy of tightening financial conditions for longer periods. This also favors a possible drop in inflation, including in Brazil, in view of lower external inflationary pressure.

Inflation and expectations about it are decisive for changes in the basic interest rate in the economy. Greater expectations of high inflation lead to an increase in the basic interest rate.