Was the COPOM Decision Unexpected?
The expression most heard just after the decision at the last COPOM meeting to raise the SELIC rate by 50 basis points, and extending the cycle of the rate increase, was that it was a “surprise”. For those only looking at the fact that “official” inflation was below the upper bound of the target interval of 6.5% (due to a combination control of administered prices and reduction of taxes on products with high weight in the IPCA), that decision could have been surprising. But it certainly was not to those who had been observing the progressive widening of the gap between the inflation rate expected 12 months ahead and the central target of 4.5%. It also came as no surprise in light of the risk that if the government continues using, like it did in 2013, tax relief and control of administered prices to fight inflation, it will be further worsening the quality of fiscal policy, increasing the probability of a downgrade from the rating agencies. This would accentuate the already strong pressures on the exchange rate caused by the excessive current account deficit in relation to capital inflows, weakening the real and increasing inflation of tradables. Finally, it was no surprise to those observing the labor market, which despite recent signs of slight cooling, is still tight, leading to growth of service prices of around 8% a year.
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