Post by account_disabled on Oct 17, 2023 23:03:34 GMT -5
The Monetary Policy Committee (Copom) of the Central Bank decided on Wednesday, 2, to reduce the Selic rate by 50 bps, from 13.75% to 13.25% . The market was divided in its expectation, with a 60% chance of a 50 bps drop and a 40% chance of a 25 bps drop . This is the first drop after almost a year of rate stability. Selic maintenance at 13.75% Source: Bloomberg The meeting announcement was filled with several insights that I want to share with you now. How does Copom define the Selic rate? To begin with, let's remember that the Central Bank uses a framework to make monetary policy decisions. Contrary to what many people think, the drops and rises in Selic do not come from the directors' will. To validate movements, the Central Bank uses an econometric model , called SAMBA , which uses several variables to predict inflation.
This model's inflation forecast is compared to the inflation cell phone number list target defined by the CMN (National Monetary Council). If the BC's projection is above the target, it has to raise the Selic rate or at least it cannot fall. If it is below the target, he has to reduce the Selic rate or at least not increase it. This is how monetary policy is decided in Brazil. As market agents already know that the Central Bank reacts in this way, they trust the framework, build their expectations and make their investments. The framework gives long-term confidence to the market. Anchoring expectations It turns out that one of the variables that most influences the BC model is the market's inflation expectations , collected by the Focus survey. Until the Copom meeting in June, this expectation was around 4% for 2025, while the inflation target was 3%. In other words, expectations were quite unmoored.
This didn't happen for nothing. When the new government took office, some members announced in the press that the CMN would change the inflation target . These statements increased market expectations, which influenced the forecast of the BC model, which, in turn, could not drop the Selic because its forecast ended up being much above the target. However, something very important happened last month. Inflation convergence The CMN reaffirmed the target of 3% per year for the coming years and did not change the target. This meeting increased market confidence in monetary policy and reduced inflation expectations for 2025 from 4% to 3.5% . Although it has not yet reached the 3% target, this reduction in expectations was enough for the BC's SAMBA model to return its 2025 inflation projection to 3%, exactly on target.
This model's inflation forecast is compared to the inflation cell phone number list target defined by the CMN (National Monetary Council). If the BC's projection is above the target, it has to raise the Selic rate or at least it cannot fall. If it is below the target, he has to reduce the Selic rate or at least not increase it. This is how monetary policy is decided in Brazil. As market agents already know that the Central Bank reacts in this way, they trust the framework, build their expectations and make their investments. The framework gives long-term confidence to the market. Anchoring expectations It turns out that one of the variables that most influences the BC model is the market's inflation expectations , collected by the Focus survey. Until the Copom meeting in June, this expectation was around 4% for 2025, while the inflation target was 3%. In other words, expectations were quite unmoored.
This didn't happen for nothing. When the new government took office, some members announced in the press that the CMN would change the inflation target . These statements increased market expectations, which influenced the forecast of the BC model, which, in turn, could not drop the Selic because its forecast ended up being much above the target. However, something very important happened last month. Inflation convergence The CMN reaffirmed the target of 3% per year for the coming years and did not change the target. This meeting increased market confidence in monetary policy and reduced inflation expectations for 2025 from 4% to 3.5% . Although it has not yet reached the 3% target, this reduction in expectations was enough for the BC's SAMBA model to return its 2025 inflation projection to 3%, exactly on target.