Copom (Monetary Policy Committee) just ‘contracted a cut’, without indicating whether it will be 0.25 pp or 0.50 pp
Today the long-awaited Copom Minutes were released, a document that justifies the decision on the Selic rate. There was great market expectation that the Central Bank would give some clue about the size of the cut in the basic interest rate for the next meeting, which did not happen.
The Copom (Monetary Policy Committee) just “contracted a cut”, without indicating whether it will be 0.25 pp or 0.50 pp. He just mentioned that he will wait for more data to make a decision.
On the one hand, there are reasons to believe that the cut will be 0.50 pp, given the slowdown in the economy and the cooling of current inflation and inflation expectations. On the other hand, there are more favorable arguments for a reduction of just 0.25 pp, such as the warming of the labor market and inflation projections are still above the target, although they are in a process of deceleration.
Undoubtedly, there are good reasons for a more modest cut (0.25 pp), as well as for a more aggressive one (0.50 pp). However, if the government did its part by cutting spending, the market’s question would not be whether the Selic would go to 14.75% per year or 14.50% per year, but perhaps below 10% per year. Otherwise, if there were fiscal control by the Treasury, the Selic would not be at this level, and the discussion would be different.
Cutting spending brings two benefits: it does not generate demand pressure, reducing inflationary risk, and enhances monetary policy, making the reduction in inflation much more sensitive to increases in the Selic. In other words, with public spending cuts, such a high Selic would not be necessary to contain rising prices.
Unfortunately, the government either does not understand this concept or avoids this effort. Of course, it’s easier to blame the Central Bank.
*This text does not necessarily reflect the opinion of Jovem Pan.
