

According to economist José Júlio Senna, the ideal scenario would be for the Copom to increase the Selic by 0.50 percentage points, although the tendency is for a 0.25-point hike given the “gradualism narrative.”
Brazil’s economy is growing above its potential, which could lead to inflationary pressures that will need to be contained through an increase in the basic interest rate.
This was the assessment of participants at the 3rd Seminar on Economic Analysis, held yesterday by Estadão and the Brazilian Institute of Economics at the Getulio Vargas Foundation (FGV/Ibre).
Economist José Júlio Senna believes that the ideal scenario would see the Central Bank’s Monetary Policy Committee (Copom) already raising the Selic by 0.50 percentage points at the next meeting on Wednesday, although the trend leans towards a 0.25-point hike given the “gradualism narrative”.
Senna stated, “There have been many signs from the BC’s officials that a rate hike is on the table, that they will bring inflation back to target, that they need to anchor expectations. The BC spoke loudly; in my view, they have to kneel and pray.
They have given so many signals of austerity and inflation fighting that there is no way out now. I imagine the ideal scenario would be a 50-point increase (0.50 percentage points) at the next week’s meeting.”
Senna mentioned that a 0.50-point increase would be in line with recent BC officials’ statements and would respond to unanchored inflation expectations and a heated economy.
He also noted that the BC had only made a single 0.25-point increase in the recent monetary policy process and that an increase of this magnitude, “given the Selic level in Brazil, doesn’t make much of a difference.”
The current basic rate stands at 10.5% per year. As reported by Estadão, the market projects up to four 0.25-point hikes in the next four Copom meetings.
Examining the current scenario, economist Silvia Matos from FGV/Ibre stated that despite the recent improvement in GDP growth composition, the country is growing above its potential, which will bring along more interest rates and inflation under pressure.
She said, “We are stimulating the economy more through the demand side, public spending, in an inflationary movement.
We’ve seen this story before. This leads to a higher equilibrium interest rate.” Matos noted that the world may still be assisting Brazil with expectations of interest rate reduction, especially in the US.
Also participating in the discussion, economist Armando Castelar, an associated researcher at FGV/Ibre, commented that the scenario of turbocharged growth is very similar to the first two terms of President Luiz Inácio Lula da Silva.
However, now, the dollar has not fallen back as before. Additionally, the situation for commodities is not so positive, with a drop in prices for important products in the country’s export basket, making it difficult to control economic parameters like inflation.
Matos also highlighted the increase in government spending and household consumption. She said, “Household consumption has been growing above GDP.
In the US, it has returned to pre-pandemic levels, but in Brazil, we have ’tilted’ towards a trend of acceleration well above that.
GDP has been growing above its potential, supported by household consumption growth,” noting that in the last two years, the Brazilian economy was mainly driven by commodities (agribusiness and extractive industry). “Now, it’s completely different. GDP is much more focused on domestic demand.”
Regarding the US economy’s context, Senna mentioned that thanks to the improvement in inflation, the United States will enter a cycle of interest rate reduction, but in a moderate manner, which will disappoint some in the financial market who still project more aggressive cuts.
He said, “The economic activity (in the US) still has a good degree of vigor. Therefore, the US monetary policy committee has to act, but with moderation.”
According to Senna, American inflation is experiencing an “undeniable improvement” despite a slight worsening in August’s data. “The data deteriorated marginally, but are still lower than the 12-month rates in the five major measures of American inflation.”