Inflation is expected to reach 3.2% per year in the second quarter of 2027, the Central Bank’s “relevant horizon”, when monetary (interest) policy would have the most effect. This is the figure spat out by the BC model, which did the calculation also considering that the Selic follows the trajectory estimated by “market” economists. That is to say, it would gradually decrease to 12.25% at the end of 2026 and 10.5% at the end of 2027.
The projection appears in the press release in which British Columbia announced this Wednesday the decision to maintain the Selic rate at 15% per year. The inflation target is 3% per year; In practice, 3.2% corresponds to the inflation target.
Will the BC then reduce the Selic in January 2026? What about “unanchored expectations”? That is to say that the inflation expected by “the market” is still at 3.8% at the end of 2026. And the inflation in services still around 6%? And the BC statement, similar to the previous meeting, with differences only for those who see hidden messages between the lines of hieroglyphs?
In the market place and among its spokespeople, the discussion is about the deadline, January or March, with half and half chances in the financial estimates. For those who need to know what to do with a lot of money, this is relevant. For the rate of economic growth, even in the short term, this difference in dates is of no importance.
The most important thing is how the Central Bank will be able to bring the Selic to at least 12.25% at the end of 2026, which is the median of the “market” forecasts collected by the BC (in the Focus Bulletin).
Starting with arithmetic and assuming that BC is measured at all eight meetings next year, there would be five reductions of 0.25 percentage points plus three reductions of 0.5 percentage points, in an unknown order, to take it from 15% per year to 12.25% per year. Will you have time? Or will there be a run-in, with reductions of 0.5 and 0.75 percentage points in the first half of next year?
In October there are elections. September, the month of the BC Copom meeting, is that of possible pre-electoral confusion: uncertainty of the favorite, financial instability, final programmatic declarations. Before that, there will be five decisions regarding Selic.
In theory, elections have nothing to do with monetary policy, although some CBs may, out of modesty, avoid the ups and downs in the run-up to the vote, to avoid accusations of partisanship.
Additionally, financial distress, particularly a high dollar, can affect B.C.’s decisions. It is reasonable to assume that the elections could cause problems on the exchange rate, especially if the favored government programs are indigestible in terms of adjusting the public accounts and the means to achieve it (more taxes, for example). This possible effect will be very uncertain until August, the month in which the candidates for the presidency of the Republic are registered, a story that is confusing, as any newspaper reader knows.
This does not necessarily mean that there will be pricing problems in financial markets. This does not mean that if there is pressure on the dollar, the effect will be greater on inflation or expectations (it depends on the evolution of the economy, here and elsewhere, and the extent of the devaluation of the real).
However, could the risk of a rising dollar and other disruptions prompt the Central Bank to be more cautious? If so, will you leave the Selic discounts for the November and December meetings, if you want to discount further?
What will happen at the rate of the Selic’s fall matters more than the doubt about January or March.
PRESENT LINK: Did you like this text? Subscribers can access seven free accesses from any link per day. Just click on the blue F below.
About The Author
