By LUIZ SERGIO CANÁRIO
A first sign of questioning the Central Bank for using forecasts obtained without anyone knowing how to be one of the pillars of setting the SELIC rate
The Central Bank of Brazil – BCB publishes weekly, normally on Mondays, the Focus Report – Market Report. This document contains the financial market's expectations for the position at the end of the current year and the three subsequent four indicators: IPCA, GDP, Exchange Rate and SELIC Rate. As the Central Bank points out, these are not the institution's expectations, but those of the market. It is how the market understands that these indicators will be at the end of each year.
On 14/05/2024 there were 171 institutions representing the market informing their expectations. These are banks, resource managers, distributors and brokers, as well as consultancies and other non-financial companies “that have specialized teams that project the main macroeconomic variables, with the aim of advising decision-making, both by professionals from the institution itself, and for its customers.” “The Market Expectations System, developed by the Central Bank of Brazil (BCB), is a system for collecting projections from market professionals.”, according to the Central Bank website.
Institutions to participate in this survey need to qualify with the Central Bank, gaining access to the website where the information is entered. The non-mandatory routine, but followed by most institutions, is to report once a week. According to the Central Bank website: “The statistics produced by the System and published by the BCB are median, mean, standard deviation, maximum, minimum and number of respondents for all variables collected... As it is less subject to extreme values, the median of expectations is the most closely monitored statistic and released in the “Focus Report” every Monday (or first business day of the week), regularly between 8:25 am and 8:30 am, based on data collected up to the previous Friday. The number of respondents from each horizon for each variable is also disclosed.”
Also according to the website: “Market expectations are an important input for monetary policy decisions. Furthermore, the availability of expectations statistics to the general public, through the BCB website, allows companies and citizens to have knowledge about what market agents are projecting, thus constituting an important tool for planning their short, medium and long term actions”.
It is a mistake to think that the market is an economic agent with great degrees of assertiveness, coherence and coordination. The table below (Frequency Distributions of Market Expectations for IPCA Selic GDP Exchange) published on 06/05/2024 on the Central Bank website, shows the degree of dispersion of market agents' expectations.
On these three dates, there were IPCA expectations for 2024 ranging between 2,94% and 5,34%. There is a 2,4 pp difference or almost twice the difference between the extremes. There is a convergence of almost 90% in the range of 3,34% to 4,14%, even so the difference between them is not insignificant. Using the median corrects this dispersion somewhat. The IPCA in FOCUS on 10/05/2024 was estimated at 3,76%. These numbers give an idea of the degree of assertiveness and coherence of financial market agents.
The following two graphs give an idea of the behavior of expectations in relation to reality.
IBGE publishes the IPCA accumulated in the twelve months prior to the end of each month. These values, which are real, are not estimates, are plotted together with the FOCUS estimates. Estimates start high and converge towards the real value as the end of the year approaches.
At the end of each quarter, IBGE publishes the GDP accumulated over the previous four quarters. In the same way as with the IPCA, but in the opposite direction, the FOCUS GDP expectation converges to the real as the year approaches.
This behavior is curious. The powerful and efficient market begins 2023 with poor expectations of two important indicators and throughout the year converges towards the real value. Even if real life, measured by IBGE, shows a different situation. While on the one hand it can be expected that as the year progresses the scenario at the end of the year will become clearer, it should not be expected that economic agents with very specialized tools and the best minds for economic forecasting would make so many mistakes at the beginning of the year. But penetrating this dark world of Faria Lima economists is not a task for everyone. As the saying goes, I don't believe in witches, but they exist, they exist.
The Central Bank admits that FOCUS is one of the tools used as an information base for the institution's and the government's most important decision-making: the SELIC, the most important interest rate in the country. It is the main mechanism that Central Banks have to control inflation. It is one of the biggest brakes or accelerators of economic activity and, consequently, unemployment. The latest FOCUS indicates a SELIC of 9,75% this year, 9% in 2025 and 2026 and only in the distant year of grace of 2027 will we have a SELIC of 8,63%. Why is this number so precise for such a distant year? Nobody knows.
The Central Bank in latest COPOM statement explicitly states in a footnote; “In the reference scenario, the interest rate trajectory is taken from the Focus survey.” The market provides the monetary authority with the reference scenario for the interest rate. There is certainly in the hermetic economic compendiums, of which market agents are in-depth knowledge, all the rationality for it to work this way.
A year ago I wrote a text commenting on the hermeticism into which economists have trapped the economy. Our economy. The one that governs our lives. The one who decides whether or not we will be unemployed. Whether or not we can take out financing to buy a TV, a refrigerator or a house to live in. From the big things to the smallest everyday things. We all need to get into the habit of wanting to know why things are this way and not that way. Why is the SELIC set using market expectations as a reference scenario, which benefits most from interest rate movements? And with expectations defined with such a degree of dispersion? Can't the main economic agents combine their expectations to force a direction that interests them? Decipher me or I will devour you.
On Monday, 27/05/2024, after this text had already been written, Deputy Attorney General Lucas Rocha Furtado presented a representation to the TCU for the “adoption of the necessary measures to identify possible deviations of purpose by the Monetary Policy Committee (Copom) of the Central Bank in defining the Selic rate”. In the representation he says: “given that the projections contained in the so-called “Focus Bulletin”, drawn up from macroeconomic research carried out by various institutions, such as banks, consultancies, brokers, among others, which may be interested in manipulating the index for their own and undue private gains and to the detriment of public interests and the treasury.”
And it continues: “Above any legal affirmation, our Federal Constitution determines that all power emanates from the people, who exercise it through elected representatives or directly, under the terms of this Constitution. What control can the people – holders of power – exercise over the definitions of Copom’s Monetary Policy?”
Finally, he ends with: “In view of the above, this representative of the Public Ministry at the Federal Audit Court, based on article 81, item I, of Law 8.443/1992, and article 237, item VII, of the Internal Regulations of the TCU, requests the Court, for the reasons given above, to decide on the adoption of the necessary measures to: (i) identify any deviations in purpose by the Monetary Policy Committee (Copom) of the Central Bank in defining the Selic rate, given that on the corresponding calculation, in apparent offense to the principles of motivation and transparency (art. 37 of CF/88), have great influence on the projections contained in the so-called “Focus Bulletin”, prepared based on macroeconomic research carried out by various institutions, such as banks, consultancies, brokers, among others, who may be interested in manipulating the index for their own and undue private gains and to the detriment of public interests and the treasury; (ii) form partnerships with the Federal Police to investigate the matter; (iii) forward a copy of this representation and the decision that may be given to the President of the National Congress”.
It may not prosper, but it is a first sign of questioning the Central Bank for using forecasts obtained without anyone knowing how to be one of the pillars of setting the SELIC rate.
To illustrate an example from FOCUS:
*Luiz Sergio Canario is a master's student in political economy at UFABC.
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