BC director defends Copom's decision that cut interest rates: 'doubling or tripling Selic would not open the Strait of Hormuz'

The director of Economic Policy, Paulo Picchetti, defended this Thursday (25) the Central Bank's decision to cut the Selic rate, from 14.5% to 14.25% per year last week, reiterating that interest policy should not fully react to "price variations resulting from supply shocks".
Supply shocks are unexpected events that suddenly change the availability or cost of goods and services and, therefore, are insensitive to changes in the economy's basic interest rate.
He compared supply shocks to a "bruise", and then explained that a possible increase in interest rates at this time would not reopen the Strait of Ornuz - which had been closed in recent months due to the war between the United States and Iran. Its closure was one of the main factors driving current inflation, and expectations for the future, by putting pressure on fuel prices.
"It's like a bruise, it takes a hit and turns purple. It has its dynamics, its inertia, no There's a lot you can do on the way to get rid of it, there's no medicine you can take. It disappears if there's no other shock", said Pichetti, about the nature of the so-called "supply shocks". pursuing the so-called "relevant horizon" of interest policy, that is, pursuing the 3% target, set by the National Monetary Council, considering inflation to end a year and a half ahead (18 months).
Pichetti explained that the institution cited, in its official statements about the interest rate cut, the first quarter of 2028, although this was not the relevant horizon (which, in this Copom, is the closed year of 2027), to show that the projections retreated more strongly in this period due to the dissipation of the supply shock in the economy (conflict in Iran and El Nino).
"It was a special situation that led us to draw attention to this. There was a bruise disappearing. We are not lengthening the relevant horizon, and we do not intend to do so. It was a very special situation that led us to draw attention to this", said the BC director.
How decisions are made
To set interest rates, the Central Bank acts based on the target system. If inflation projections are in line with targets, it is possible to lower interest rates. If they are above, the Copom tends to maintain or increase the Selic.
Since the beginning of 2025, with the beginning of the continuous target system, the objective has been set at 3% and will be considered met if inflation oscillates between 1.5% and 4.5%.
When setting the interest rate, the BC looks to the future, that is, to inflation projections, and not to the current price variation, that is, in recent months.
This occurs because changes in the Selic rate take six to 18 months to have a full impact on the economy.
Right now, for example, the institution is already aiming, in theory, at the target considering the year 2027 closed.
For next year, the financial market estimated, last week, that the IPCA will be at 4.15%, that is, well above the central target of 3%, while the BC projects inflation of 3.7% this year. period.
The distancing of the market's inflation projection from the central inflation target for next year did not, however, prevent the BC from lowering interest rates in the last two Copom meetings.
The Central Bank informed, in the statement of the decision to lower interest rates, released last week, that it assesses that "alternative trajectories guaranteeing the convergence of inflation to the target in the first quarter of 2028, the relevant horizon from its next decision, are compatible with the smoothing of the variation in macroeconomic aggregates".

Source: G1