Elevation of the Selic Rate: What Will Be the Next Step?

BRAZIL ECONOMICS - Report 27 Jan 2014 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

There are two interpretations for the 50-basis-point hike in the SELIC rate at the last COPOM meeting. The first is that it was a reaction to the “surprisingly high” inflation in December, to be followed by slight deceleration in January, strengthening the expectation of just one more increase, of 25 points, at the meeting in February, ending the tightening cycle. The second is that since the government can no longer employ, to the same extent as in the past, direct actions on administered prices and tax relief on products with large weight in the IPCA, an interruption in the cycle would raise the probability – already high – that the 12-month IPCA will exceed the upper bound of the target interval just a few months before the elections. The minutes of the last COPOM meeting do not allow assessing the likelihood of each of these two interpretations, and the market’s bets remain divided.

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