The March inflation numbers, which came in well above consensus expectations, once again increased the market’s distrust that the Central Bank will be able to meet its goal of ending the cycle of interest rate hikes at the next Monetary Policy Committee (Copom) meeting in May.
The skepticism of financial agents was reflected in the increase in bets that the end-of-cycle interest rate will be higher than the Central Bank had signaled in its last monetary policy meeting, 12.75%. The negative surprise with benchmark inflation index IPCA pushed future rates to price the Selic policy interest rate around 13.25% for the end of 2022.
“In terms of monetary policy, today’s [Friday’s] result strengthens our scenario that the Central Bank will need to revise its inflation projections of 6.3% for 2022 and 3.1% for 2023, and then revise its baseline scenario for monetary policy to interrupt the tightening cycle in May. We maintain our bet that the Central Bank will increase the benchmark interest rate by 100 basis points in May, 75 basis points in June and 50 basis points in August, to 14%,” Credit Suisse professionals wrote in a report.
There are also scenarios of even higher interest rates in Brazil. According to investment bank Haitong’s chief economist for Brazil and professor at the Getúlio Vargas Foundation, Marcos Ross, the widespread price hikes may force the Copom to raise the interest rate beyond 14%.
“Thinking about the balance of risks, there is no way to think that the Central Bank will be comfortable with this data, it is a number that will have an impact on expectations. I believe that reality will impose itself and the Copom will not stop tightening in May,” he says.
After the release of the index, Haitong revised its IPCA estimate for 2022 to 7.4% from 6.8%, and for 2023, to 4.1% from 3.7%. The basic scenario of the bank for the Selic is that the Central Bank should opt, in the end, for making a gradual end of cycle — the monetary authority had been signaling its intention to close the interest rate hike in the next Copom meeting, in May. “We see another 100 basis points hike and a reduction in the pace, from 75 basis points and 50 basis points in August”, says Mr. Ross, citing the bank’s projection of a Selic rate at the end of the cycle of 14%.
In an alternative scenario, Haitong predicts that the lower doses of tightening planned for June and August may increase, in the face of current pressured and widespread inflation. “The risk is, instead of another 75 basis points hike, there will be another 100 basis points hike, and 50 basis points of hike will turn into 75 basis points,” he says. “So I imagine, in an alternative scenario, that the Selic could exceed 14%.”
At Bank of America, the data generated a revision of year-end inflation expectations to 8.0% in 2022 and 4.5% in 2023. “All in all, this corroborates our view that the Central Bank will not be able to interrupt the tightening cycle in May. We expect a final 50 basis points hike in June, raising the Selic to 13.25%, but the risks are up,” write professionals with BofA, in a report signed by the head of economics for Brazil and Latin America strategy, David Beker.
Source: Valor International