By CESAR LOCATELLI*
Are the projections and scenarios used by the Central Bank of Brazil consistent with the reality subsequently verified?
“Policies that rely too heavily on unobservables can often end in tears (Athanasios Orphanides)
The current decision model for the basic interest rate of the Brazilian economy, the Selic rate, is primarily influenced by forecasts of inflation, the result of public accounts, etc. Such projections are made by financial market agents, made public through the well-known Focus bulletin, and by the Monetary Policy Committee itself, the Copom. Would they be consistent with the later verified reality? Would inflation forecasts provide clues about actual inflations in the months or years that followed?
These questions about the adherence of projections and scenarios to reality and to what extent they add new and useful information for making monetary policy decisions guided the study Weaknesses in Focus and Copom forecasts, published by the magazine Research & Debate, from the Graduate Program in Political Economy at PUC-SP.
The intended evaluation was based on the simple comparison between the scenarios that supported the monetary policy decisions and the reality that followed. 34 minutes of Copom meetings, from December 2018 to January 2023, were selected. For each Copom minutes, two other reports immediately prior to each meeting, also produced by the Central Bank of Brazil, were also evaluated.
A Demad's review (Department of Open Market Operations) is weekly and brings data from primary auctions of public securities, exchange swap operations, outright operations in the secondary market of public securities and committed operations that have the BC as a counterparty. In addition, the Demab review shows the yield curve based on data from the DI x Pre swap operations carried out on B3.
The Focus Market Report, also weekly, compiles the expectations of selected market agents, especially financial ones, on inflation, exchange rate, GDP, Selic rate, etc. for current and future years.
Evaluation of forecasts
Table 1 was built with data from the Focus Market Report, published weekly by the Central Bank of Brazil. The lines correspond to each Copom meeting and show an order number, the meeting number, the month and year of the meeting, the center of the target in effect on the date and the interest rate decision taken at the meeting. The upper part of the table shows the IPCA effectively registered by the IBGE for each year. The data, in the lines corresponding to each Copom meeting studied, are the expectations of the Focus bulletin for each year.
We can see, for example, how the expectation for the 2021 IPCA evolved: in December 2018 and throughout 2019, an IPCA of 3,75% was expected for 2021. .2020%, in the middle of the year, and ended the year at 3,00%. The expectation at the beginning of 3,34 was 2021% and rose rapidly to 3,43% in December 10,18. Inflation in 2021, as measured by the IBGE, was 2021%.
Example: Copom meeting number 238, May 2021
Among the various examples gathered in the study, Copom Meeting number 238, in May 2021, stands out. The inflation target in effect at that time was 3,75% +/- 1,5% and the unanimous decision was to raise the rate from 2,75% to 3,5%. The more intense than anticipated pandemic contrasted with the growth of the Brazilian economy. That was the mood of that 238 Meeting.
As usual, the minutes presented, right at the beginning, the result of the most recent Focus survey, dated April 30, 2021: “Inflation expectations for 2021, 2022 and 2023 calculated by the Focus survey are around 5,0. 3,6%, 3,25% and 2021%, respectively”. The inflation rates, measured by the IPCA, effectively calculated for 2022 and 10,06 were 5,79% and 2021%. Thus, for 5,06, the divergence between the inflation predicted by Focus, in May of the same year, and the actual one was XNUMX percentage points. Actual inflation was more than double that predicted by financial market analysts a few months before the end of the year.
The Focus report also included the Selic rate forecast for the closing of 2021 and 2022: 5,50% and 6,25%. The rates that were effectively in effect at the end of 2021 and 2022 were 9,25% and 13,75%. Deviations representing 68% and 120%, there were eight months to the end of 2021 and 20 months to the end of 2022.
The exchange rates expected by the market analysts who form the expectations revealed by the Focus bulletin were R$5,40 for the two end of the year. Effectively, the exchange rate ended 2021 at R$5,58 and at R$5,22 the following year. Very small discrepancies in the exchange rates, between the predicted and the real ones, in comparison with those of the interest rate and inflation.
What did the basic scenario of the Copom say?
“In the basic scenario, with a trajectory for the interest rate extracted from the Focus survey and an exchange rate starting at R$5,40/US$, and evolving according to the purchasing power parity (PPC), the Copom's inflation projections are around 5,1% for 2021 and 3,4% for 2022”.
The differences between the projection of the Copom model and the actual inflation were 4,96 percentage points for 2021 and 2,39 for 2022. Which is equivalent to saying that in 2021 inflation was 97% higher than the Copom forecast in May 2021 and 70% higher than that of 2022. "In this scenario, the projections for inflation of administered prices are 8,4% for 2021 and 5,0% for 2022", added the minutes. Administered prices rose, in fact, by 16,9% in 2021 and fell by 3,82% in 2022. The deviation percentages were, therefore, 101% and 175%.
Did the public bond market and the DI x Pre swap market bring signals that did not match this 75 basis point increase in the Selic rate, from 2,75% to 3,50%?
The interest curve, on 30/04, was very steep, going from 2,75% to 3,27% in 1 month, to 4,30% in 6 months, to 5,22% in 1 year and 6,62% % in two years. The shorter LTN, 1/7/22, came out at 5,67%. Apparently, there were signs that, in financial market jargon, the “Copom was chasing the market”. In other words, the actions of the Copom ratified, with delay, what the market already incorporated in prices. The Copom recognized this by stating that “the Committee assessed that another adjustment of the same magnitude would be appropriate at the next meeting”.
The study points out that several problems that need to be addressed were not addressed so that we will have, in the future, a more efficient monetary policy that causes less disruption to employment. And he concludes that: “The priority, however, established for this exercise was to bring the question of technique to the center of the stage as opposed to the question of politics. The fragile forecasts made by the Focus report and by the Copom show that decisions on the basic interest rate are taken in a state of complete uncertainty. No credibility can be given to a model, a method or a calculator of any nature that starts from projections so devoid of any connection with reality. The disjunctive that presents itself is to find more efficient methods of constructing scenarios or to accept the eminently political nature of the decision on the basic interest rate of the economy and to bear the consequences of this finding”.
* Cesar Locatelli, Independent journalist, he is a doctoral candidate in the World Political Economy program at UFABC.
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