New increase in Selic reflects period of uncertainty; high should not be continuous

After the Monetary Policy Committee (Copom) announced a 0.25% increase in the Selic this Wednesday (18), the basic interest rate was 10.75%. Although inflation in general was the main motivator for the measure, another reason pointed out by experts is government spending above revenue.

In its statement, Copom highlighted inflationary pressures beyond fiscal policy (balance in government accounts). Thus, the rise in service prices and expectations regarding inflation were aspects mentioned. Beto Saadia, investment director at Nomos, also pointed out factors that have the power to increase inflation (via CNN):

“We see a stronger dollar, a climate crisis that impacts the price of food and energy, in addition to a very strong GDP, above potential. Our potential GDP growth is approximately 2% per year, and we estimate growth of 3% in 2024”.

Tax Policy

Even though the Copom statement addressed inflation along with economic growth, the fiscal aspect is a reason for attention. Brazil has had a monthly deficit in this sector since June 2023, with a significant increase in 2024. In fact, the expectation is that more spending will occur next year.

“It is not possible for Brazil to focus solely on monetary policy without fiscal policy also being considered”, argued Paloma Lopes (via CNN), economist at Valor Investimentos.

In its statement, Copom mentioned that “closely monitors how recent fiscal policy developments impact monetary policy and financial assets”.

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_{Inflation in 2024 is lower than accumulated in 12 months (Photo: reproduction/freepik/Freep!k)}

Recent history and next steps

Selic began its climb in 2021. The reason was primarily an attempt to curb inflation amid the Covid-19 pandemic. It reached 13.75% in 2022, the maximum recorded in the period. Since August 2023, with Lula as president, there has been a downward cycle.

For experts, raising the Selic rate again is the way to achieve the established goal. “If the Copom had done nothing, it would have torn up its inflation target. Now he said it's for real and he's going to act,” said Banco Master chief economist Paulo Gala (via CNN).

The Copom decision was taken in a period of uncertainty, but there are factors that could reduce inflation. The interest rate cut in the US and lower commodity prices are some of them. There is also an expectation of appreciation of the real with the inflow of foreign capital, reflecting the new increase in the Selic. Even so, the cycle should not increase as in recent years nor last for a long period.

Featured Photo: Selic rises again after more than two years (Reproduction/carlitocanhadas/Pixabay)