The Central Bank of Brazil released the Focus Bulletin on June 30, 2024, which showed an upward revision in the median projections for inflation in the country this year. The expected percentage rose from 4.17% to 4.31%, indicating a slightly higher inflationary pressure than previously estimated.
Despite the increase in inflation, the median Selic rate projected for December 2024 remained stable at 12.50%. However, this value experienced a recent rise, as in the previous week the average projection for the interest rate increased from 12.25% to 12.50%. Therefore, the financial market signals an expectation of high interest rates for the end of the year.
The Monetary Policy Committee (Copom) had already implemented a recent cut in the Selic, reducing the rate from 15% to 14.75% on June 18, 2024. Even so, half of the institutions consulted by the Central Bank believe that the basic interest rate tends to rise by the end of the year. Thus, the economic scenario reflects persistently high interest rates.
In terms of economic growth, the forecast for Brazil’s Gross Domestic Product (GDP) in 2024 is an expansion of up to 1.85%. Although the growth rate remains modestly positive, this result shows challenges for the country’s economic performance, especially given the persistent pressures on inflation and high interest rates.
These projections indicate a cautious monetary policy environment, aiming to control inflation through interest rates that are not expected to fall in the short term. Even so, the general expectation is that monetary authorities will keep the Selic at relatively high levels until the end of 2024, as evidenced by the released report.
Context and Impacts of Monetary Policy and Economic Scenario
Brazil faces an economic slowdown that is aggravated by the maintenance of the Selic rate at high levels. Meanwhile, consumption has declined significantly, reflected in increased delinquency and the elimination of formal jobs, especially in sectors most sensitive to credit variations.
Businesses and workers report the negative effects of the current monetary policy. The increase in the Selic, which revolves around a historic percentage, has generated difficulties for investments and compromises the household budget, which limits economic recovery. Thus, the business environment remains challenging and unfavorable to growth.
The rise in interest rates is mainly justified by the increase in oil and fuel prices in the external market. The conflicts involving Iran, the United States, and Israel intensified geopolitical tension, pressuring the cost of the barrel and consequently raising the price of diesel and gasoline in Brazil.
This increase directly impacts agricultural prices and transportation services, fundamental sectors for the domestic economy. The rise in fuel costs pressures production and logistics costs, which may lead to pass-throughs to the final consumer, adding to the already inflationary environment.
On the other hand, the adjustment in the interest rate does not resolve structural problems related to fuel supply. The measure does not contribute to increasing energy production nor to stabilizing domestic prices, showing limitations in face of the current challenge.
Furthermore, the payment of interest on public debt exceeds the mark of R$ 1 trillion per year, an amount that benefits financial investors. This high cost of debt consumes resources that could be directed toward policies to stimulate economic activity or social investments.
Therefore, maintaining a high Selic amid slowing growth may deepen the recession in Brazil. Monetary and economic authorities still need to evaluate the balance between curbing inflationary pressures and avoiding more severe impacts on employment and productive activity.
