Roberto Campos Neto argued that it is still unclear what, from the recent turmoil, will or will not become more perennial


Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

Roberto Campos Neto — Foto: Marcelo Camargo/Agência Brasil

Brazil’s Central Bank President Roberto Campos Neto got rid of the forward guidance that indicated a 50-basis-point interest rate cut for the next meeting of the Monetary Policy Committee (COPOM) in May and left open four possibilities. At an XP Investimentos event in Washington, he said that international and fiscal uncertainties have increased too much to allow the COPOM to keep the old promise.

On the other hand, he argued that it is still unclear what, from the recent turmoil, could remain in place for enough time to affect the Central Bank’s work in lowering inflation to the target—and consequently, the trajectory of the Selic policy rate.

Three weeks before the next COPOM meeting, Mr. Campos Neto listed four theoretically possible scenarios that could lead to different outcomes for the decision to be made on the interest rate.

First hypothesis: “We could see a reduction in uncertainty, which means we would follow the usual path.” He was not explicit about what the usual path would be, but apparently it would be a reduction in interest rates by 50 basis points, as was previously signaled, to 10.25% per year from 10.75%.

Second hypothesis: “We could have a situation where uncertainty remains very high, but it does not change significantly. That would mean a reduction in pace.” That is, the Central Bank would cut 25 basis points, to 10.5% per year.

Third hypothesis: “We could have a situation where uncertainty begins to affect more strongly important variables, and we would have to change the balance of risks.” Mr. Campos Neto was not explicit about what this hypothesis would mean for interest rates, but the logic of the gradation he employed seems to indicate a maintenance of the rate.

Fourth hypothesis: “We could have a scenario where uncertainty worsens, creating global stress. In this case, we would change our global scenario,” said Mr. Campos Neto. In this case, apparently, he is referring to the possibility of raising the policy rate.

This way, the Central Bank’s chief provided a sort of roadmap for the financial market to monitor the development of the recent crisis—international and fiscal—in order to anticipate the COPOM’s reaction to each of the situations.

And why didn’t he deliver a hawkish, more direct message? For him, with the current high degree of uncertainty, it’s difficult to anticipate the situation that the COPOM will encounter in three weeks.

“You do not want to react too much to short-term data, but at the same time you do not want to ignore a structural change to the point of losing your credibility,” said Mr. Campos Neto.

To know what the COPOM will do, it’s important to pay attention to what Mr. Campos Neto said about what is a surprise and what is not in recent events. It’s also good to re-examine the Central Bank’s so-called reaction function, that is, how it uses the new information that will emerge in the next three weeks to make its decisions.

He said he kind of expected the worsening in the international environment. This helps to understand why he said last week, after the release of U.S. inflation data, that the scenario had not changed substantially.

But another factor wasn’t in the Central Bank’s calculations: the deterioration of Brazil’s fiscal situation. Still, on at least two occasions he expressed doubts that this worsening will translate into a permanent increase in the risk premium. “When you change [the fiscal target], the premium moves further,” he said. “I hope that doesn’t happen.”

Mr. Campos Neto expressed concern, in particular, about the relationship between fiscal credibility and monetary credibility. The main indicator that the Central Bank has lost credibility will be inflation expectations, especially longer-term ones.

As for the monetary policy reaction function, the main message is that there is no mechanical relationship between fiscal policy, external environment, and monetary policy. It will be necessary to see how these recent events affect the COPOM’s central scenario for inflation and the balance of risks. This is what will determine which of the four hypotheses above will be adopted by the COPOM at its next meeting.

*Por Alex Ribeiro — São Paulo

Source: Valor International
In an environment of external pressure and maturing NTN-As, the agency will offer the equivalent of $1 billion in currency swaps


Sérgio Goldenstein — Foto: Leo Pinheiro/Valor

Sérgio Goldenstein — Foto: Leo Pinheiro/Valor

The sentiment that the scenario allowed for a significant appreciation of the domestic exchange rate lost strength. On a day when the dollar rose globally, the Brazilian real was among the currencies that suffered the most, with the exchange rate remaining firmly above R$5, its highest level since October 2023. The pressure on the Brazilian currency was primarily external due to the renewed strength of the U.S. economy. However, domestic factors also played a role, such as the approaching maturity of dollar-linked bonds (NTN-As), which led the Central Bank to announce the first intervention in the foreign exchange market since December 2022.

Shortly after the markets closed, the monetary authority announced that it would hold an extraordinary auction of up to 20,000 currency swap contracts, equivalent to $1 billion. It will be the first foreign exchange swap offering since May 2022. The action also marked the end of a tense day in the markets. The exchange rate ended Monday’s (01) session up 0.87%, trading at R$5.0591 per dollar, the highest level since October, after reaching R$5.0704 at the day’s peak.

The global movement was a determining factor in the pressure on the exchange rate. The process of repricing U.S. interest rates took on new contours after strong statements from two leaders of the Federal Reserve (Fed) last week—director Christopher Waller and chairman Jerome Powell. As the market advances with the start of an interest rate cut cycle in the U.S., the dollar strengthens.

However, the real stood out negatively in Monday’s session. Among Latin American currencies, the Brazilian currency was at the bottom. The dollar rose 0.42% against the Mexican peso, 0.58% against the Chilean peso, and 0.04% against the Colombian peso. Among the world’s most liquid currencies, only the Turkish lira managed to continue rising.

On Monday, the activity index for the U.S. industrial sector startled investors by rising from 47.8 points in February to 50.3 in March, thus reaching a level that indicates expansion for the first time since September 2022. Additionally, the price sub-index rose from 52.5 to 55.8 points, which could indicate a scenario of more intense inflationary pressures in the sector, turning on the yellow light among market participants.

“Until then, these prices had been more controlled. Moreover, the Fed has been placing significant emphasis on inflation data as a condition for its future actions, in this case, a possible interest rate cut,” noted Marcel Yagui, currency manager at BlueLine Asset.

The market, he says, has begun to cast doubt on the start of the interest rate cut in June, which had been considered quite likely. According to the CME Group at Monday’s close, Fed funds futures indicated a 58.4% chance of an interest rate cut in June and a 41.6% probability that the easing cycle wouldn’t begin until later.

“The relevance of this data is undeniable given the recent context of more conservative statements from the Fed. The movement could only be one of rising interest rates and a stronger dollar,” said Mr. Yagui. In this context, BlueLine reduced its long positions (which bet on appreciation) in the real.

Although external factors were decisive for the dynamics of the session, they were not the only ones that influenced the behavior of the exchange rate. Market participants have been pointing out in recent weeks that the maturity of NTN-As could generate some stress in the exchange rate, although they were not betting on extraordinary action by the Central Bank.

“I have the impression that the initial idea of the Central Bank was to let the market absorb this maturity, which is relevant but not huge. However, with the more adverse external environment exerting pressure on the real, they opted to mitigate the potential additional impact on the exchange rate resulting from the maturity of the NTN-As,” said Warren Investimentos’ chief strategist, Sérgio Goldenstein.

The maturity of the papers on April 15 is expected to create a demand for the American currency of around $3.7 billion, which had already heightened the perception among agents that the exchange rate could be more unstable at the beginning of April. From the low to the high of the day in Monday’s session, the dollar fluctuated by more than R$0.06, a level not seen in recent trading sessions.

“These bonds originate from the process of exchanging foreign debt for domestic debt,” explained Mr. Goldenstein, who once headed the Central Bank’s Open Market Department (DEMAB). “It’s undoubtedly an exchange rate pressure because it’s unlikely that the Treasury will renew these bonds,” he explained. “Entities holding these bonds are effectively buying in dollars. Upon the bonds’ maturity, these entities will no longer hold their positions. If they wish to maintain their investment position in dollars, they would need to re-enter the market [to purchase more dollars].”

Some traders even mentioned that the pressure might not be so significant as the bonds could be protected with some kind of hedge. Mr. Goldenstein, however, emphasizes the need to distinguish between the Central Bank, the Treasury, and the private sector, noting that the process could still exert pressure on the exchange rate. “If there is a hedge, someone in the market has to provide it, so it remains within the market,” he said.

In the view of Banco Pine’s chief economist, Cristiano Oliveira, the Central Bank acted appropriately since the maturity of NTN-A introduces distortion to the foreign exchange market, which has already been affected by uncertainties surrounding U.S. monetary policy. “Domestic factors do not suggest a devaluation of the real. The Central Bank should monitor the market closely until maturity and, if necessary, offer more swaps. The real depreciated more than its peers on Monday because of that,” he explained.

The assessment of some financial agents aligns with Mr. Oliveira’s perspective on the domestic fundamentals, suggesting room for an appreciation of the Brazilian currency. This perception was quite relevant at the turn of the year, but successive disappointments with the dynamics of the exchange rate have led to a “cleansing” on the technical side, with a reduction in optimistic positions on the real.

Among foreign investors, the long position (betting on a rise) in the dollar through derivatives such as dollar futures and currency swaps reached an all-time high last Friday, climbing to $68.44 billion. Local investors, meanwhile, continue to hold a short position (betting on a decline) in the dollar against the real, amounting to $13.3 billion.

In a monthly call on Monday (01), Fernando Chibante, currency manager at Occam, stated that the firm continues to bet on the Brazilian real’s appreciation, citing the positive carry trade and stable external accounts as key factors. “Additionally, last month, we saw a significant improvement in technical factors. Even though the real experienced some deterioration throughout March, we attribute much of that to the broader external scenario, particularly the stronger dollar,” he explained.

*Por Arthur Cagliari, Victor Rezende — São Paulo

Source: Valor International
Market sees monetary authority cutting Selic by 50 basis points this week


Eduardo Jarra — Foto: Silvia Zamboni/Valor

Eduardo Jarra — Foto: Silvia Zamboni/Valor

The market is eagerly awaiting this week’s decision by the Central Bank’s Monetary Policy Committee (COPOM). Unlike January, when there were no surprises, this Wednesday’s decision is being closely watched by agents. At a time when the collegiate body is still defending the need for a contractionary stance to tackle inflationary pressures, the debate on the appropriate level of restriction is gaining momentum in the market, increasing anxiety about the COPOM’s announcement.

Valor consulted 135 financial institutions and consultancies and the consensus is that the key interest rate Selic will be cut by 50 basis points this week, to 10.75% from 11.25% per year. In the longer term, the median of the estimates points to a base rate of 9% at the end of this year and 8.5% in December 2025.

Despite the stagnation in central expectations, the context of this week’s COPOM meeting points to a more complex macroeconomic environment. Since the January meeting, there have been significant upside surprises in economic activity; current inflation has been much higher than expected by the market—and by the Central Bank itself—in recent months, with pressures on the services side; and the market has once again postponed expectations for the start of interest rate cuts in the United States.

In Valor’s monitoring of Central Bank forecasts for the Selic rate at the end of the cycle, 16 institutions have raised their estimates since January. In some cases, the revisions were more modest, such as Itaú Unibanco and Quantitas, which raised their forecasts by only 25 basis points. On the other hand, some financial firms made more significant revisions, such as Genoa Capital (to 9.25% from 8.5%) and Opportunity (to 9% from 8.25%).

On the other hand, 20 firms lowered their interest rate forecasts at the end of the year. Most of them had forecast a more restrictive monetary policy at the end of the cycle in their scenarios and are now closer to the market consensus. This was the case for Ativa Investimentos (to 9.5% from 10.5%), Morgan Stanley (to 9% from 10%), and MCM Consultores (to 9.5% from 10%).

“There is a sequence of data that points towards stronger activity, with a more heated labor market, with low unemployment and rising wages. The latest data puts an upward bias on our growth forecast for this year, which is 1.7%,” said Eduardo Jarra, chief economist at Santander Asset Management. “However, we haven’t seen any cyclical event that would force the COPOM to change its communication.”

The Santander fund manager cut his estimate for the Selic rate at the end of this year to 8.5% from 9.5% at the turn of the month. “We were hoping for more confidence in the disinflation process,” said Mr. Jarra, who now sees Brazil’s official inflation index IPCA at 3.6% per year at the end of 2024. “There is a benefit to the Central Bank proceeding cautiously, taking measured steps at a prudent pace. They can stretch it out a bit more,” said the economist.

Given that inflation is expected to fall, that core measures will continue a gradual process of disinflation, and that there have been no relevant changes in either the external scenario or the information on the conduct of fiscal policy from the Central Bank’s point of view, Mr. Jarra believes that the great interest of this week’s meeting will be focused on the “forward guidance” that the Central Bank has been using to guide economic agents regarding the next steps in interest rates.

Since the beginning of the cycle, in August 2023, the COPOM has indicated in its statements that its members “foresee a reduction of the same magnitude in the coming meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process.” If this view is now maintained, the market would understand that the Selic rate may fall to at least 9.75% per year. However, if the guidance is removed or softened, the committee would be sending a more hawkish message.

“This issue has been frequently raised during the period between the meetings, and based on what Central Bank leaders have said, it will be addressed. There will certainly be a discussion at the meeting, but I’m not sure about what will happen, whether they will keep the plural or adopt the singular. None of these scenarios would surprise me,” said Mr. Jarra.

*Por Victor Rezende, Augusto Decker — São Paulo

Question mark is whether the fiscal policy will not get in the way


The Central Bank remains confident that the high interest rates are being transmitted to economic activity and will have the desired effect to lower inflation. Obviously, the question is whether the fiscal policy will not get in the way.

The Central Bank’s Inflation Report released Thursday tries to argue that unlike what many analysts believe, there is economic slack, which is having an effect on prices.

In this study, the Central Bank divides the prices of services into two groups. One includes those that are more inertial, that is, prices that rise because of past inflation. The other includes prices linked to the economic cycle, which rise less when there is economic slack.

The results presented by the Central Bank show that prices of services linked to the cycle are lower and falling at the margin. This would be a sign that, in fact, there is economic slack.

This slack is estimated by the Central Bank at 0.8% for the third quarter of this year. The monetary authority said that this slack tends to grow further because the monetary tightening will be felt more strongly by the economy. At the end of this year, the economic slack will probably be at 1.1% and reach an even higher level at the end of next year, at 1.8%.

The Central Bank has revised its estimate of slack, which was a little higher. But this revision is due to the fact that the GDP was revised, and economic growth was higher than expected. This means lower slack, but nothing changes the qualitative assessment that there is slack.

The Central Bank’s estimate of economic slack is much higher than that estimated by the financial market, which sees the economy operating at total capacity in the third quarter of this year (technically an output gap of 0.1%) and an economic slack of 0.7% at the end of next year.

Some economic analysts have questioned the Central Bank, arguing that there is an analytical flaw. Inertial service inflation depends on different variables than cyclical service inflation. Thus, it would be incorrect to say that there is economic slack just because one is below the other.

Diogo Guillen — Foto: Silvia Zamboni/Valor

Diogo Guillen — Foto: Silvia Zamboni/Valor

Confronted with this question, the Central Bank’s director of economic policy, Diogo Guillen, explained that this part of the report illustrates what a set of models used by the Central Bank, which points to the existence of economic slack, says. In this part, in the most recent data, the inflation of services linked to the cycle is receding.

In the section of the Inflation Report where the Central Bank analyzes short-term inflation, there is also some of the monetary authority’s view on the effect of economic slack on inflation.

The monthly readings came higher than expected, partly due to fresh food inflation. But they were not so high thanks to services. “Services inflation was significantly lower than expected, with emphasis on the more favorable dynamics of its underlying component.”

Mr. Guillen has argued precisely that one should look at inflation to identify the effect of economic slack. In fact, the economic slack is calculated in order to know what is going to happen to inflation.

In short, the Central Bank’s report shows that it sees monetary policy working as expected, confirming a scenario in which inflation falls toward the target. Uncertainty about the next administration’s fiscal policy is one thing that may get in the way.

All the noise surrounding the public accounts since President-elect Luiz Inácio Lula da Silva’s victory in the elections has already started to enter Central Bank’s scenario, albeit incipiently.

The Central Bank’s inflation projections have been somewhat stable in recent months, indicating a price hike of 3.3% in mid-2024, basically in line with the targets. But within this stability, some factors accelerate inflation, while others slow it down. In the end, they cancel each other out.

The inflation report lists factors that, since September, have acted in the direction of raising the inflation projection: the short-term inflation surprise and a lower economic slack than previously estimated.

But some forces reduce the inflation estimate. Among them is the fact that the market expects interest rates to start falling only in August, not in June as previously estimated. There is also the fact that the level of economic uncertainty is higher.

These two facts are linked to fiscal uncertainty, which makes the monetary tightening and financial conditions more severe than expected, pushing the economy into a downward spiral.

*By Alex Ribeiro — Brasília

Source: Valor International
In face of fiscal risks, Copom maintains key interest rate Selic at 13.75%


Central Bank's building in Brasília — Foto: Reprodução/Facebook

Central Bank’s building in Brasília — Foto: Reprodução/Facebook

Central Bank’s Monetary Policy Committee (Copom) kept intact the key interest rate Selic at 13.75% per year and its monetary policy message that foresees the maintenance of the rate at high levels for a sufficiently prolonged period.

Nevertheless, it intensified the tightening a little bit, by confirming at least a part of the financial market’s expectations that the current interest rate level in the country should be higher, due to fiscal uncertainties brought by President-elect Luiz Inácio Lula da Silva’s fiscal policy.

On Wednesday, the Copom found in its models an inflation rate of 3.3% for the 12-month period through June 2023. The percentage did not change much from the previous meeting’s estimate of 3.2% in October.

But this time the Central Bank uses in its projection a slightly higher interest rate path in the second half of 2023. In October, the assumption was that interest rates would start to fall in June, reaching 11.25% a year by the end of next year.

Now, the assumption is that interest rates will only fall in August, ending 2023 at 11.75% per year. That is, over the second half of 2023, the interest rates used in the projection are about 50 basis points higher.

The Central Bank uses, in its models, the trajectory for the Selic rate forecast by the market. Since all the fiscal uncertainty began with the strong break of the spending cap, economic analysts started to forecast slightly higher interest rates.

On Wednesday, with its projection, the Central Bank sent a message: the analysts are right in putting a little more interest rates on the Focus, the Central Bank’s weekly survey with analysts. If the interest rate cut were to start in June 2023, as previously expected, the projected inflation would probably be a bit higher, and further away from the target. The Copom is targeting an inflation rate of 3.125% for the 12-month period through June 2023, considering an average between the goals set for next year (3.25%) and the following year (3%).

For the time being, the Copom has confirmed only a little of the additional dose of interest rates that the market has incorporated. It has not gone as far as to legitimate all the huge risk premiums that are in the interest rate curve traded in the market, which has suffered a strong increase.

But, in a way, this upswing in market interest rates is entering into the Central Bank’s estimates, as it causes a strong deterioration in financial conditions.

This more hostile environment throws the economy down and widens the economic slack somewhat. But it does not necessarily slows down inflation, because the effect of fiscal uncertainty may prove to be stronger.

At the same time that it is incorporating some of the damage caused by fiscal uncertainty, the Copom is trying to maintain a degree of serenity, apparently so as not to worsen a picture that is complicated enough.

The Copom raised its inflation projection, but not too much, so as not to corroborate stronger interest rate hikes. Also, it stopped short from saying that its balance of risks for inflation has become asymmetric, tilting to the negative side, which could also require an even higher Selic rate.

The Copom sent the message that depending on how fiscal policy evolves, it may have to act. It referred to the “high” uncertainty in its balance of risks. And, although it preached serenity in the evaluation of fiscal policy, it said it will closely monitor how it will affect the foreign exchange rate and inflation expectations going forward.

*By Alex Ribeiro — São Paulo

Source: Valor International

Decision was in line with median of market expectations and signaled in the previous meeting


Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

The Central Bank’s Monetary Policy Committee (Copom) decided to maintain the key interest rate Selic at 13.75% per year on Wednesday, as signaled at the previous meeting in September. The decision was unanimous.

The decision was in line with the median of market expectations. According to a survey conducted by Valor, all 108 financial institutions consulted expected the interest rate to remain at 13.75% per year.

In the statement released on Wednesday, the Copom said the decision reflects uncertainty surrounding its scenarios and balance of risks with even greater than usual variance. The committee states that the decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy.

The Copom also states it will remain vigilant, assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation

At the September meeting, the Central Bank had already stated that it would remain vigilant, “assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough to ensure the convergence of inflation.”

Throughout the cycle, which began in March 2021, the monetary authority raised the Selic rate by 11.75 percentage points, for 12 consecutive times, in the face of a scenario of high and persistent inflation. The Copom will meet again on December 6 and 7.

*By Larissa Garcia, Alex Ribeiro — Rio de Janeiro, São Paulo

Source: Valor International

In private meetings with investors in Washington, policymakers emphasized commitment to goals


Banco Central

With the monetary tightening cycle over and the Selic benchmark interest rate at 13.75%, the Central Bank tried to demonstrate a vigilant attitude with the conduct of monetary policy in private meetings between directors and investors in Washington, in the scope of the meetings of the International Monetary Fund (IMF) and the World Bank.

Market participants heard by Valor on condition of anonymity emphasize the cautious tone of the Brazilian monetary authority and the emphasis given to the willingness to bring inflation back to the target.

Roberto Campos Neto, Central Bank’s president, took part in two meetings closed to the press on Friday and tried to reinforce his commitment to make inflation converge back to the targets. In one of the meetings, he reportedly said twice that he wanted to convey the message of serious commitment to the target, besides being concerned, in particular, with the dynamics of services inflation.

Mr. Campos Neto’s statements come in the wake of movements in the interest rate market that point to the possibility of the Selic rate cuts cycle starting as early as March 2023. He also stated, in one of the meetings, that the Central Bank’s job is to bring inflation back to the target and that the monetary authority will do whatever is necessary for this to happen.

Mr. Campos Neto was even questioned in one of the events about the behavior of inflation expectations and about when the cycle of Selic cuts might start. And, when analyzing the market’s behavior, the president of the Central Bank stated that part of the expectations of interest rate cuts embedded in the curve are more related to technical positioning and the probabilities of the scenario ahead.

Thus, according to one of the participants, Campos pointed out that the yield curve does not necessarily place reductions in the Selic faster than the Focus.

Thus, according to one of the participants, Mr. Campos Neto pointed out that the yield curve does not necessarily place cuts in the Selic rate faster than Focus, Central Bank’s weekly survey with economists.

In the Focus published last week, the median expectation of market economists is that the cycle of Selic cuts will start in June 2023, when the relevant horizon for the conduct of monetary policy will already be fully in 2024. A market professional present at one of the meetings even pointed out the perception that the Focus scenario, with the start of the easing cycle in June, still seems to be the most adequate for the Central Bank, at least for the moment.

Mr. Campos Neto was also questioned about the Brazilian fiscal situation and, in the perception of market participants, adopted a slightly more optimistic tone with the public accounts, although he emphasized the uncertainty in the scenario. “He noted that the data are coming in very good and better than expected, but also said that there is a degree of uncertainty in the future,” said one of those present.

This same source observes that Mr. Campos Neto, in his presentation, compared fiscal measures that have been implemented to contain the surge in energy commodity prices and noted that the measures adopted in Brazil are below the actions of other countries. “This set a tone of less concern about fiscal policy. It seems that the caution in this area is more in the long term, in the fiscal framework,” said the source.

Also present in Washington, Fernanda Guardado, Central Bank’s director of international affairs and corporate risk management, took part in a private meeting with investors, in which she used a more cautious tone when talking about the fiscal uncertainties ahead.

Ms. Guardado also maintained a more concerned tone when speaking about fighting inflationary pressures. According to market players, she was attentive to the existing uncertainties in the labor market and the degree of economic slack. A person who was present at the meeting stated that Ms. Guardado was in a more cautious position in relation to unobservable factors, such as the output gap (a measure of the economy’s slack), given that there were significant revisions in the economic scenario, which started to show a more closed gap.

In the September meeting of the Monetary Policy Committee (Copom), Ms. Guardado was one of the dissenting votes, defending an additional 25 basis points increase in the Selic, to 14%. The majority of the committee, however, voted to maintain the key interest rate at 13.75% at the meeting.

The only event open to the press in Washington with the presence of Roberto Campos Neto took place on Saturday, at a Group of 30 (G30) seminar. During his participation, he observed that the domestic interest market has begun to price the beginning of a cycle of Selic cuts in March 2023 and stated that this could mean “that the markets understand that we have done our job”.

Mr. Campos Neto also pointed out that Brazil has had three consecutive months of deflation. “A lot of that was because of government measures, so we don’t think it’s a special reason to celebrate. But the dynamic is improving,” he stated in the opening of his panel at the event.

*By Victor Rezende — São Paulo

Source: Valor International

Monetary authority has said divergence does not mean signaling of monetary policy by committee as a whole


Central Bank President Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados

Central Bank President Roberto Campos Neto — Foto: Billy Boss/Câmara dos Deputados

Dissenting votes in the Central Bank’s Monetary Policy Committee (Copom), such as the ones seen in Wednesday’s meeting, are bound to become more frequent from now on with the independence of the monetary authority, and should no longer be such a rare event.

Since 2016, under Alexandre Tombini, the Central Bank has not recorded dissenting votes. On Wednesday, directors Fernanda Guardado (International Affairs) and Renato Gomes (Organization) wanted to raise interest rates by 25 basis points, while the majority decided to maintain Brazil’s key interest rate Selic at 13.75% per year.

But this does not mean that, previously, there were no divergences among its members. They occurred especially in the most critical periods, as the beginning and the end of the monetary tightening cycle. But they were not expressed in the votes.

An important point: the Central Bank has said that divergence of views and votes does not mean signaling of monetary policy by the committee as a whole. They simply show that policymakers have different opinions. It is important to know these views in order to analyze if one argument or another gains strength in the committee.

In January 2021, for example, at least three members of the Copom defended, in the discussions that took place in that meeting, that the committee should immediately start a cycle of interest rate hikes – the key rate was then at 2% per year. The majority won, but in the following meeting, the interest rates went up, even more than expected by the market.

There was also divergence in the mid-2020s when the Copom discussed how far it could take the key rate down in response to the Coronavirus pandemic. Most directors argued that the room for interest rate cuts was more limited because an emerging economy could not live with interest rates as low as developed countries without increasing risks to financial stability. At least three Copom members thought that interest rates could be lowered further.

There may have been other critical moments of divergence in meetings that were not made explicit in the Copom statements. There were strong rumors in the market, for example, that policymakers diverged in late 2021, when the committee maintained the pace of monetary tightening at 150 basis points.

There are several possible explanations for the lack of divergence in the committee votes. It may be just that its composition has been more homogeneous. It could also be the style of the last presidents – Ilan Goldfajn and the current one, Roberto Campos Neto – in the search for consensus in the decision, despite divergences in the debates.

But it may also be a governance defect of our Central Bank, in which the president had more powers than the other members. Until the independence of the Central Bank, the president of the monetary authority was the one who indicated the other members of the collegiate board to the president of the Republic. So there was a certain hierarchy, with a president of the Central Bank who, at any time, could fire the directors.

The independence of the Central Bank changes this situation, because policymakers have fixed terms of office, regardless of the president of the Republic and the president of the monetary authority.

Today, the Central Bank’s board has greater cohesion because all members were chosen by the current president, Mr. Campos Neto. But in February 2023, the terms of two Copom members, including the monetary policy director, Bruno Serra, will end. In December 2023, two more terms will expire.

The new members will be nominated by the president of the Republic to be elected in October, and in theory may have a less homogeneous vision, when compared to the current team. This increases the chances not only of dissident votes but also of public remarks from members with different views.

This is an additional argument for not seeing dissenting votes as monetary policy hints. They are, in fact, an indication of the committee members’ leaning to one side or the other in the execution of monetary policy, as is the case in other central banks, such as the U.S. Federal Reserve.

*By Alex Ribeiro — São Paulo

Source: Valor International

Lack of consistency in inflation projections still worries asset managers


The Central Bank has tried to cool expectations that it will start reducing Brazil’s key interest rate as early as the first quarter of 2023. The fact that short-term inflation slowed down and commodity prices went south in the international market was a determinant to bringing down future interest rates in the last few days. This backdrop paved the way for the market to price in the yield curve the key rate, known as Selic, below 13.75% per year as early as March 2023.

The rise in future rates on Tuesday partly eliminated this variation. Yet, some market participants still expect interest rate cuts early next year.

Central Bank President Roberto Campos Neto told the audience at an event held by Valor on Monday that the monetary authority is not thinking about lowering interest rates at this moment. He has also reinforced the message of the last meeting of the Monetary Policy Committee (Copom), in August, when the Central Bank indicated that it will analyze the need for raising the Selic once more. Mr. Campos Neto’s message was reinforced by Bruno Serra Fernandes, the bank’s monetary policy director, who showed concern on Tuesday about the de-anchoring of inflation expectations for 2024 – the median is 3.43%.

“The work of the Central Bank has already been done. It recognizes this and has signaled that, from now on, it must remain cautious in order to bring inflation expectations to the target. We agree. The Central Bank must remain cautious, but we also think that this stance will make inflation converge to the target,” said Gustavo Pessoa, a partner and fixed-income manager at Legacy Capital. The firm’s baseline scenario includes rate cuts starting in March 2023.

“Since inflation is just starting to slow down, the Central Bank doesn’t want to commit to cuts, but reality will weigh in. Inflation has started to give way strongly, and not only because of the government’s measures. And this lower inflation has left the real interest rate [ex-ante] close to 9%, a level that will be enough to make inflation converge to the target. This will allow the Central Bank to start cutting interest rates at some point,” Mr. Pessoa said.

In Legacy’s view, in March 2023 the monetary authority will look, in particular, at inflation for 2024 on the relevant horizon, whose expectation is today at 3.43%. “We expect expectations to anchor again and the median of 2024 projections to return to 3% by March. The Focus expectations will probably drop, given the Selic rate level. So it would be a natural path for the Central Bank to start cutting interest rates. We think this will happen as of March, and how fast interest rates will drop depends a lot on inflation dynamics here and abroad,” he said.

On Monday, the yield curve was pricing a cut of about 0.20 percentage points in March 2023 as the starting point for an easing cycle. After the market closed on Tuesday, there was a relevant repricing, and the market stopped betting on cuts in the first quarter of next year.

Alexandre de Ázara, the chief economist of UBS BB, believes that Mr. Campos Neto wants to combat expectations of a premature start to the easing cycle. “I believe he said that it is important to maintain interest rates flat for a while. In my view, the Central Bank doesn’t like to see the market price cuts in the first quarter and I think he wanted to fix that,” he said.

Mr. Ázara believes it is early to price a cut in the first quarter, but sees room for stronger cuts throughout next year, as of June. UBS BB projects that in 2023 the Central Bank will make four 100-basis-point cut in the Selic rate, starting in the second meeting of the second quarter, and a final 50-basis-point reduction in 2023. In addition, the bank expects the cycle to continue in 2024, with the Selic reaching 7.75%.

“This will help inflation to converge to the target in 2024. If it falls too slowly, inflation will not converge in 2024. If it falls too early, it will not converge in 2023,” said Mr. Ázara, whose projection for Brazil’s official inflation index IPCA next year is 4%, well below the market consensus of 5.27%.

Cooler commodity prices in the international market have been key for the downward variation in short-term interest rates in recent weeks. Brent oil prices, now close to $90, drew attention.

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

“For two and a half years, commodities put upward pressure on inflation. It was a headwind that is now changing a little into a tailwind. I think this factor hindered the Central Bank a lot, but now it can be helpful,” said José Carlos Carvalho, a partner and head of macroeconomics at Vinci Partners. Yet, he recalled that services inflation is still under pressure. “Activity is still strong and should remain that way, but commodity-related prices more than make up for the rise in services.”

Mr. Carvalho believes that the Central Bank closed the monetary tightening cycle with the Selic at 13.75% and has a downward trajectory of interest rates ahead, considering that the real interest rate in Brazil is between 7% and 8%. According to him, these are quite high levels, well above the natural rate of interest, which is around 4%. “With help from commodities and the time for monetary policy to make its effect, the cycle of Selic hikes is over. There is no reason for the Central Bank to deliver even higher interest rates,” he said.

The cycle of interest rate reduction is related to the new federal administration and its fiscal policy, the executive with Vinci said. “In the first quarter of 2023, the Central Bank will still want to understand the fiscal policy of the next administration. In the second quarter, if it is the right thing to do, it can start thinking about cutting interest rates,” Mr. Carvalho said.

The fiscal policy is precisely one point highlighted by Tomás Goulart, the chief economist of Novus Capital, to advocate the view that the key interest rate is unlikely to start being reduced at the beginning of next year. He also cited the level of interest rates in developed countries, especially in the United States.

“The fiscal anchor is the first condition for the Central Bank to start reducing the Selic. It must know what the fiscal anchor will look like in the next administration, given the fact that the spending cap has lost credibility,” he said, citing the rule created to limit growth in public spending to the previous year’s inflation, which was circumvented by the Bolsonaro administration. The monetary authority will only feel ready to start easing the Selic when it finds out which fiscal regime will prevail in Brazil, he said.

“And then, considering the legislative process, we still don’t know what the next administration will be and what will be proposed in terms of an anchor. There is no clarity at the moment. And the legislative process to replace the fiscal anchor and pass something in Congress that has credibility should take around six months, that is, it will be time-consuming,” he said. When assessing the necessary conditions for the Central Bank to start reducing the key interest rate, Mr. Goulart said that such a cycle may start in June or August 2023.

*By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

Economists are anticipating a more challenging scenario for the Central Bank to meet inflation targets


Central Bank's building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Central Bank’s building in Brasília — Foto: Divulgação/Rodrigo Oliveira/Caixa Econômica Federal

Fuel tax cuts will remain in place next year, which lowered financial market inflation expectations for 2023 but did not prevent them to rise in 2024 – a year that is already entering the monetary policy radar.

And the market has begun to factor in fewer interest rate cuts next year, anticipating a more challenging scenario for the Central Bank to meet inflation targets.

The Central Bank’s Focus survey with analysts, released Monday morning, shows that the market’s median projection for inflation in 2023 has dropped to 5.27% from 5.3%. It is the third consecutive week of decline in market projections for inflation.

This drop may be linked to the fact that fuel tax cuts will remain in place next year, per the budget bill. The measure, which some market analysts had already priced in, has the potential to lower inflation by 0.6 percentage points next year.

But the measure could also have a negative effect in the longer term because it increases the fiscal risk. In fact, the market’s median inflation forecast for 2024 increased again this week, to 3.43% from 3.41%.

The deterioration in inflation expectations for 2024 is of particular concern because the Central Bank has lengthened the time frame in which it intends to bring inflation to the target. Today, the Central Bank manipulates interest rates with a view to bringing inflation to the target in the first quarter of 2024.

The Central Bank has signaled that it is reaching the end of the monetary tightening cycle. But some analysts believe, according to the Focus survey, that the Central Bank will have to tighten the key interest rate Selic more, or at least postpone interest rate cuts.

The distribution of expectations about interest rates, released Monday by the Central Bank, shows that 80% of analysts think that the monetary authority will leave interest rates stable at 13.75% in the next meeting, in two weeks, keeping them at this level thereafter. But 20% predict a further increase, to 14% per year.

The market is calculating that there will be less room for interest rate cuts in 2023. Before, the median of the analysts’ projections indicated an interest rate of 11% per year at the end of 2023; now, they see the rate at 11.25% per year.

Besides the worsening of fiscal risk after the budget bill was sent to Congress, inflation expectations for 2024 may have been influenced by the second-quarter GDP data, which show that the economy is growing above expectations – a development that may hinder the Central Bank’s efforts to slow down inflation.

The map of the distribution of inflation expectations shows that only a little more than a quarter of economic analysts believe that inflation will stay within the target in 2024, set at 3%.

More than 30% of analysts think it will stay well above the target, in the range between 3.68% and 4.28%. The mapping also shows an upward bias in expectations for 2025, with about 40% of analysts projecting inflation above the target of 3%.

*By Alex Ribeiro — São Paulo

Source: Valor International