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Market expects benchmark interest rate to surge

The inflationary scenario already called for caution and indicated a great challenge ahead for the Central Bank. The concerns of market players, however, have increased as inflation has raised a red flag, with an even more persistent character, while the monetary authority has given signs that the end of the tightening cycle is near. The deterioration of the scenario continued to materialize in market projections: the escalation of inflation expectations continued and an increase in the Selic policy interest rate beyond June entered the debate strongly.

Between May 24 and 27, Valor consulted 101 financial institutions and consultant firms about projections for inflation and policy interest rates this year and in 2023. Since the last survey, published on May 12, the median of expectations for Brazil’s benchmark inflation index IPCA increased to 8.9% from 8.35% this year and to 4.5% from 4.2% in 2023.

Regarding the Selic rate, the median of the estimates remained at 13.25% at the end of this year but increased to 9.63% from 9.5% at the end of 2023. The simple arithmetic average of the projections for the Selic at the end of this year also rose, to 13.48% from 13.39%.

With the basic interest rate at 12.75%, the Central Bank has contracted a new increase in the Selic rate in the June meeting, at the same time that it has given increasingly clear signals that it wants to end the monetary tightening cycle that started in March 2021. Nevertheless, the monetary authority has started to adopt a more data-dependent strategy.

Part of the market has migrated to a scenario foreseeing a hike in August. Two weeks ago, 25% of the estimates indicated a rise in interest rates in August. In the current survey, this scenario is already defended by about 36% of the institutions.

Fernando Rocha — Foto: Leo Pinheiro/Valor

Fernando Rocha — Foto: Leo Pinheiro/Valor

“There is a desire to stop, but we still have very bad inflation. In every month, the [mid-month inflation index] IPCA-15 and the full IPCA have been surprising us negatively,” says Fernando Rocha, chief economist at JGP. He expects the Central Bank will try to end the cycle but will not succeed. That’s why JGP projects the Selic rate at 14.25% at the end of the cycle.

“I see the risk of the Central Bank stopping and inflation expectations getting even worse. If current inflation were a little better, showing signs of slowing down, I believe it [the monetary authority] would be more comfortable, but it is getting worse and spreading,” observes Mr. Rocha. The scenario projected by JGP is one of the most complex for disinflation in 2023, as it foresees the IPCA at 5.6% next year.

Brazil’s mid-month inflation index IPCA-15 for May scared the market about the dynamics of inflation. The acceleration of the cores raised the alarm among economists regarding scenarios of even more persistent inflation ahead.

“The IPCA-15 had a very bad quality indeed, really bad. The Central Bank, in fact, has already raised interest rates a lot, but we are afraid that it will end up stopping the cycle with an inflationary situation of this nature. This could further de-anchor expectations”, points out the chief economist at Truxt Investimentos, Arthur Carvalho, whose projection indicates the Selic at 13.75%.

He argues that it is better for the Central Bank to keep raising interest rates now in order not to run the risk of having to raise the Selic even more in the future due to the chance of further de-anchoring of expectations.

Mr. Carvalho notes that there has been a change in the monetary authority’s strategy, which has become more dependent on data. “Before, the Central Bank was very explicit and now it is no longer being so, in order to try to see if, as time goes by, it can get some evidence that the monetary policy is working. So the best thing right now is to slow down to buy time,” he argues.

Claudio Ferraz, chief economist for Brazil at BTG Pactual, is also attentive to the unfavorable surprise of the IPCA-15. “A highly disseminated inflation, with very high cores, is the kind of composition that leads one to reassess the short and medium-term scenario, impacting longer-term projections,” he says.

The prospect that the cycle of Selic hikes will end with the rate at 13.25% gained less clear features, in the economist’s view. “Although we expect a 50 basis points increase now in June, the risks are up. They have been growing in the sense that we might have another high in August,” he says.

Mr. Ferraz, however, says that clearer signs of an economic slowdown could prevent the Central Bank from extending monetary tightening into the second half of the year. “The debate could grow if the activity data in June and July start to show a sharper weakening. There is still a long period for the Central Bank to monitor economic indicators, but in that sense, it depends on the data.”

At least in the short term, economic activity has shown resilience, despite the tightening of monetary and financial conditions observed since the end of last year. “If demand proves more resilient than expected, the Central Bank’s job will become more difficult. However, we believe that due to the lag in the monetary policy action, of about nine months, most of the effect of the real interest rate tightening will be observed in the second half,” says Andressa Castro, chief economist at BNP Paribas Asset Management.

For her, it is not possible to draw hasty conclusions about the monetary policy action based on the positive surprises of recent months in activity. “In this sense, the main indicators to monitor will be the pace of consumption of excess savings, which has contributed to the resilience of demand, and the performance of the most credit-sensitive sectors, such as construction and discretionary consumption,” she emphasizes.

Ms. Castro, however, notes that if the gap between 2023 inflation expectations and the target continues to increase, it could generate additional pressures on the Central Bank. “According to our models, if expectations rise above 5%, a movement that is already starting to happen, it would be necessary to tighten the Selic more, entering the second half of the year, to avoid an even greater de-anchoring,” she says. For Ms. Castro, this scenario would increase the chances of the Selic approaching 14% — which is not in BNP Paribas Asset’s baseline scenario at the moment.

In fact, de-anchoring of expectations has proven to be even more pronounced. Of 99 estimates collected in Valor’s survey for the IPCA in 2023, 24 already indicate that inflation will end the next year above the target cap.

“There is no longer any discussion about the dangers of inflation spreading. This is already a fact,” says Dalton Gardiman, chief economist at Bradesco BBI. He points out that in his estimate of 8.5% for the IPCA in 2022, some effect of the reduction in sales tax ICMS on fuels and electricity is already considered.

However, there is a prospect of major disinflation next year, given the prospect that global economies — Brazil included — will lose traction in 2023. “The big theme and the biggest challenge in the year 2022 is inflation. I believe that this theme will become growth in 2023,” says Mr. Gardimam. Because of that, he projects stagnation of the economy next year and inflation at 4.5%.

(Anaïs Fernandes and Marta Watanabe contributed to this story)

Source: Valor International

https://valorinternational.globo.com

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Benchmark interest rate expected to increase to 12.75%

There is unanimous expectation that this week the Central Bank’s Monetary Policy Committee (Copom) will raise the Selic, Brazil’s benchmark interest rate, by 100 basis points, to 12.75%. However, if the decision itself gives signs of predictability, the communication to be adopted by the monetary authority has been widely discussed among market agents, as well as Copom’s next steps, considering that interest rates are already at high levels, but also that current inflation remain relentless and that medium term inflationary expectations continue to move away from the targets.

A survey carried out by Valor between April 27 and 29 shows that, of the 99 institutions surveyed, all of them project that the Selic rate will be raised to 12.75% next Wednesday. The unanimity seen in the expectations for May, however, opens space for division in the market as to the end of the cycle. Of the total, 25 institutions believe that the cycle will already come to an end this week, while 74 see further action ahead, with the basic interest rate entering the 13% range. As for the end of the year, the median of the projections indicates the Selic at 13.25%, but 23 institutions project a higher rate.

To most of the market, a residual adjustment of 50 basis points in the Selic in June is necessary, as the de-anchoring in the medium-term inflation expectations has become more accentuated. If, before the March meeting, the survey carried out by Valor indicated inflation at 6.5% this year and 3.8% in 2023, now the scenario is even more challenging. The midpoint of the expectations collected last week, after the release of the April reading of mid-month reading for inflation index IPCA-15, shows inflation at 7.72% at the end of the year and 4% at the end of 2023.

Thus, the communication from the monetary authority about the way ahead is key for market participants at this moment. Since the beginning of the cycle of Selic hikes in March 2021, Copom has opted to give guidance to market participants on what it foresees for the next meeting. In the last meeting, in March, and in subsequent events, the committee reinforced that it saw the Selic at 12.75% as adequate at the end of the cycle. However, the market has moved to higher numbers as inflationary pressures have continued to escalate.

Thus, in this meeting, a good part of the market believes the Copom is expected to change its communication strategy and leave its next steps open, without committing to a decision in June. “This is a Central Bank that traditionally opts for greater assertiveness in its communication, but considering the stage of the cycle, we think that this statement can be less emphatic in relation to future steps, leaving open the possibility of an additional hike in June, even if of a smaller magnitude,” says Roberto Secemski, CFO for Brazil at Barclays.

Elisa Machado — Foto: Leo Pinheiro/Valor
Elisa Machado — Foto: Leo Pinheiro/Valor

A similar scenario is defended by ARX Investimentos CFO, Elisa Machado, when reminding that the inflationary process shows contamination of the entire dynamic part of inflation, especially the nuclei linked to services, which continue to grow. It is worth pointing out that the IPCA-15 of April had a diffusion growth to 78.7%, which scared market participants, even with the indicator below the consensus expectations of players.

“We have a war going on, which can still have an impact on commodity prices; an inflationary process that still shows contamination; besides the whole issue of bottlenecks and the ‘zero Covid’ policy in China, which does not contribute to diminish this situation,” emphasizes Ms. Machado, whose baseline scenario points to Brazil´s benchmark inflation index IPCA at 4.5% in 2023. So, although she emphasizes that the interest rate hike was “significant”, since the Selic went to 11.75% from 2%, the economist points out that the monetary authority needs to gain degrees of freedom in its communication.

“Given all this degree of uncertainty, the choice is likely to be for flexibility. This is not the time to lose degrees of freedom, but rather to gain it. It would be the most appropriate”, she argues. Ms. Machado also notes that the external scenario requires concern, since, even with the monetary tightening cycles announced in developed markets, the projected real interest rates are still negative or close to zero, which would require attention to possible adjustments ahead. On Friday, the 10-year U.S. real interest rate closed the trading session at just 0.01%.

“At this moment, facing so much uncertainty regarding the inflationary process abroad and in Brazil, doubts about the geopolitical impact, Fed raising interest rates and the Covid outbreak in China, it makes sense for the Central Bank to keep at least a gap open [for additional adjustments in the Selic],” argues the superintendent of macroeconomic research at Santander, Maurício Oreng. “The door is closing, but I believe they will keep a gap open for some eventuality.”

Mr. Oreng believes that Copom should use the statement to reinforce the idea that the cycle is nearing its end. Thus, for him, it is possible that the committee will indicate what it foresees for the June meeting. “Historically, the pattern of the Central Bank has been to give more signals about the next decision. I tend to think that they are going to signal a 50 bp hike and say that [the cycle] is nearing the end, perhaps placing more emphasis, but I don´t expect they will set in stone the last hike will be in June,” he says.

With the increase in inflation expectations since the March meeting, to 4% from 3.7%, Mr. Oreng says that by incorporating this movement in the preliminary calculations made by Santander, even with a slightly more appreciated exchange rate, the tendency is to have an increase in the Central Bank’s projection for the IPCA in 2023, given the important weight of expectations in the authority’s model.

“With that, the trend is not to follow the plan of stopping interest rate hikes now. We are expecting the Central Bank to adjust this plan for the June meeting,” says Mr. Oreng, “And if we are correct in our estimate, it might signal something like a 50 bp hike in June.”

Vinland Capital CFO Aurélio Bicalho follows the same line, also expecting Copom to signal a rise in interest rates in June. “Being coherent with the conditions that the Central Bank itself has set, my understanding is that it should come with a communication that there will be an additional gradual or smaller adjustment,” he points out.

In trying to summarize the evolution of the macroeconomic scenario since March, Mr. Bicalho notes that expectations have risen; current inflation has evolved in a worse way; the international scenario has demanded caution in the face of Fed tightening; and the fiscal side, although with no major news, continues to present risks.

He also believes that Copom’s inflation projections will rise, in a scenario of a still asymmetric balance of risks. “And in paragraph 18 of the minutes [of the March meeting], the Copom says that if the scenario was closer to 3.4% inflation in 2023, the assessment was that the cycle should be even more contractionary,” he says.

The economist emphasizes that the evolution of inflation expectations is an even more important factor than if there were a worsening in the Central Bank’s projection due to oil prices. “It is a warning sign that inflation may become more persistent and more detached from the target,” he argues. And it is based on this scenario that Mr. Bicalho evaluates that Copom will signal an interest rate hike in June.

At GAP Asset, the fact that the Central Bank has had a posture of giving guidance on the next steps gives support to the possibility of maintaining this strategy in this week’s meeting. “I think the Central Bank is expected to signal something and the most likely is to actually stop the cycle or give another 50 bp hike. I think delivering another 50 bp increase is the most likely scenario,” says Anna Reis, partner and economist at GAP Asset.

(Gabriel Roca contributed to this story)

Source: Valor International

https://valorinternational.globo.com

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Benchmark interest rate expected to return to double-digit level

Saiba o que é e como fazer excelente benchmark - Sebrae

At the end of 2021, concerns over weak economic activity dominated the debate over the direction of monetary policy. At the beginning of 2022, recent news suggests even higher interest rates, and for a prolonged period. High commodity prices, worrisome surprises in current inflation, high fiscal risk, still unanchored inflation expectations, and the more challenging external backdrop drive an even more heated debate about the direction of interest rates.

In a survey conducted by Valor with 112 financial and consulting firms, there is a unanimous expectation that the Selic will be raised this week by 150 basis points to 10.75%, in line with what was signaled by Central Bank’s Monetary Policy Committee (Copom) in December. Brazil’s benchmark interest rate was at double-digit levels for the last time in July 2017.

The survey also shows that the median of market estimates for the Selic at the end of the current monetary tightening cycle is up. Before the December meeting, the median indicated a rate of 11.75%. Now, the estimates have risen to 12%.

“The inflation picture remains bad since the [Copom’s] last meeting, and a set of risks signal higher interest rates,” said Aurélio Bicalho, chief economist at Vinland Capital, who projects the Selic at 12.75% at the end of the cycle, in May. Besides the domestic inflation and the uncertainty about Brazil’s public accounts, the more hawkish signals from the U.S. Federal Reserve, which suggests a cycle of faster interest rate hikes in the United States, make the scenario faced by Brazilian policymakers more challenging, he said.

The preliminary official inflation report for January (IPCA-15) unveiled last week brought worse-than-expected cores and diffusion figures, which concerned market players even more. Given this context, Valor also collected inflation projections for 2022 and 2023, the years that make up the relevant horizon of monetary policy.

The median of 110 estimates for this year’s inflation was 5.24%, compared to 5% in the last survey conducted in 2021. The inflation target for this year is 3.5% and the top of the target range is 5%. Of the total, 82 analysts (74.5% of the sample) already project Brazil’s benchmark inflation index IPCA at 5% or more at the end of this year. For 2023, the midpoint of 107 estimates collected rose to 3.4% from 3.3%.

“The likelihood of a Selic rate above 11.75%, which is our current projection, has grown,” said Simone Pasianotto, chief economist at Reag Investimentos. “The persistence of inflation, which shows more inertial signs and a strong pressure from food, has put a question mark over what the peak of the Selic will be.” The economist predicts the IPCA at 5.7%, above the market consensus.

HSBC was among those projecting a slower pace of interest rate hikes from February’s Copom meeting on but changed its mind and now expects an even stronger tightening. “There wasn’t enough time between December and now for the Central Bank to start slowing down,” said Ana Madeira, the bank’s chief economist for Brazil, which sees the Selic at 11.75% at the end of the cycle.

“Inflationary pressures have resurfaced at the beginning of the year; oil is at very high levels and there may be new pressure on food due to bad weather conditions,” she added. Although the data surprised upwards at the beginning of the year, she expects the coming months to show a major slowdown in inflation, with potential positive surprises such as electricity prices. HSBC projects that the IPCA will end the year at 4.2%, well below the market consensus.

With inflationary and external risks very much in the background, the agents will be mainly attentive to the Copom’s statements about the next steps. Economists are divided about the signals that the committee will give to the markets. One group argues that the Central Bank tends to maintain its tough tone in the fight against inflation and in rebalancing expectations, and point to a new interest rate hike in March of the same magnitude or a little less – of 100 basis points. Another group, however, believes that policymakers may not define the projected pace of tightening at the March meeting, given the higher than usual level of uncertainty.

“It seems that they will release a bit more open statement regarding what they will do in March, but we expect another tough statement. They have nothing to gain by being dovish at the moment, given the challenges of current inflation, expectations that remain above the target and a tighter monetary policy environment looming abroad,” said Claudio Ferraz, BTG Pactual’s chief economist for Brazil.

The bank’s scenario includes, besides the 150 basis points increase in interest rates now, a new 100 basis points hike in the Selic in March, followed by a final 50 basis points increase in May, which would take the basic rate to 12.25% — a level that would be maintained at least until December. Mr. Ferraz notes that at the beginning of the year the market’s mood changed as it started to pay more attention to the more pressured current inflation and to statements about monetary policy in the developed world, which pushed weak activity to the back burner.

Mr. Ferraz believes that the Copom may start slowing down interest rate hikes without signaling the magnitude of the increase. In addition, the absence of commitment with the next step to be taken “is the best stance amid volatility and uncertainty due to internal issues as well as external factors.”

André Loes, the chief economist for Latin America at Morgan Stanley, foresees that the Central Bank will remain willing to “doing whatever it takes” to deal with inflation, but without committing to a 150 basis points hike for the next meeting, under the risk of “ending up in a situation where it reaches a higher terminal rate than it would like.” The bank forecasts a basic interest rate of 12.25% at the end of the cycle, in May.

“I believe that the Central Bank will explain that the real interest rate, after the February hike, will already be quite high,” he said. Mr. Loes also believes that the monetary authority will become “data-dependent.” In other words, it will take future decisions based on indicators and, thus, leave the door open for slowing down interest rate hikes in March.

Morgan Stanley projects a 100 basis points hike in March and 50 basis points in May, when the cycle would come to an end. Furthermore, the U.S. bank is among those already projecting an interest rate cut this year, which would take place after the elections and reduce the Selic to 11.25% at the end of this year.

Andressa Castro, chief economist at BNP Paribas Asset Management, believes that the Copom may indicate on Wednesday the “beginning of the end of the cycle” of Selic tightening. “We see a more gradual adjustment due to the more benign behavior of implicit inflation in the market and by the stabilization of inflation expectations from Focus,” she said, citing the Central Bank’s weekly survey with economists.

According to data from Renaissance, there was an accommodation of implicit inflation, which is extracted from NTN-Bs, government bonds indexed to the IPCA – especially the shorter-term ones. In addition, the short-term IPCA coupon futures contracts (DAP) also show some relief. At Friday’s closing, the DAP pointed to an inflation rate of 5.43% this year and 5.25% in 2023.

Ms. Castro makes a caveat that, however, reductions in the Selic may only happen in 2023, should the fiscal deterioration scenario materialize, given that “today’s tax waiver becomes tomorrow’s inflation.”

“If, after the elections, there is no stress on the exchange rate in such a way as to compromise inflation and if expectations for 2023 and, mainly, for 2024, due to the displacement of the relevant horizon, are anchored, it would indeed be possible to reduce interest rates this year. However, we see this as not so likely and expect the interest rate to fall only in 2023,” the economist said.

Mr. Bicalho, with Vinland, on the other hand, is among those arguing that the most prudent thing to do would be for the Copom to maintain its tough stance and signal a new 150 basis points tightening in March. The economist notes, in particular, that the more conservative tone adopted by the monetary authority in December managed to contain the de-anchoring of inflationary expectations.

“However, there was no complete re-anchoring, looking at both market metrics and Focus itself,” he said, in reference to the median of the bulletin’s projection for the IPCA of 2023, above the center of the target. He believes that by indicating a 150 basis points hike in March, the Copom “will have a great chance to reinforce its commitment to the targets and consolidate the reanchoring process.”

Source: Valor international

https://valorinternational.globo.com/

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