Analysis: Domestic data is ambiguous and there is no room for interest cuts

The official inflation preview for June slowed to 0.41%, after registering 0.62% in May, according to the IPCA-15 released by IBGE this Thursday (25).

Despite the relief in the indicator, CNN Money columnist Gesner Oliveira assesses that the domestic scenario remains full of ambiguities and, from a technical point of view, there is no room for further cuts in the basic interest rate.

Economy challenges monetary policy
When analyzing the BC (Central Bank) Monetary Policy Report, the IPCA-15, the statement and the minutes of the last Copom (Monetary Policy Committee) meeting, Oliveira stated that the Brazilian economy presents a behavior that is difficult to explain.

According to him, even after several months with one of the highest real interest rates in the world, economic activity remains resilient.

"The economy is posing a challenge", he stated, highlighting that the job market continues to be strong and that the National Construction Cost Index recorded inflation exceeding 7% in the labor component in just two months.

For the economist, this scenario raises doubts about the recent conduct of monetary policy. With inflation above the target, high inflationary expectations and rising projections, he considers that the interest rate reduction promoted by the BC requires additional explanations.

Oliveira pointed out some hypotheses for this behavior, such as the influence of the political cycle, possible greater political interference in the monetary authority, the government's fiscal and credit stimulus to aggregate demand, the assessment that the external shock would be temporary and the financial difficulties faced by sectors such as industry and agribusiness.

Neutral interest rates could be higher
The columnist also cited a model developed by Goa Associados, prepared by economist Rafael Prado, according to which the neutral interest rate - that compatible with the balance of the economy - would be close to 10%, well above the estimate used by the BC, between 5% and 6%.

"If our model is correct, we are facing a situation in which either there will be a much deeper fiscal adjustment or we will have to live with structurally higher interest rates", he stated.

No room for new cuts
When asked about the possibility of a new reduction in the Selic at the August Copom meeting, Oliveira was categorical in stating that he sees no room for this movement.

According to him, the assessment is based on the current balance of risks and inflation projections for 2027 and the first quarter of 2028. Although he recognizes that high interest rates harm investment and economic activity, the economist argues that the main challenge continues to be the construction of a more consistent and predictable fiscal policy, capable of making monetary policy more effective.

In the external scenario, Oliveira observes that the recent drop in international oil prices tends to alleviate some of the inflationary pressures. Even so, it assesses that domestic indicators remain contradictory, combining signs of slowdown with persistent pressures, especially in services inflation and core inflation.

In view of this situation, the columnist argues that the BC maintains a cautious stance, avoiding early warnings about Selic's next steps and taking its decisions based on the evolution of economic indicators.

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Source: CNN