Analysis: Market sees 12.75% as floor for interest rate

Many economists are questioning technical basis and rhetoric behind Central Bank's decision — Foto: Raphael Ribeiro/BC
Many economists are questioning technical basis and rhetoric behind Central Bank’s decision — Foto: Raphael Ribeiro/BC

Economic analysts, in general, understood that the Central Bank’s Monetary Policy Committee (Copom) signaled a rate of 12.75% per year at the end of the current interest rate tightening cycle. Yet many still see this level as the floor for the Selic, Brazil’s benchmark interest rate.

Economists and traders told Valor that the end-of-cycle signal, this time, was weaker and subject to revisions since the committee linked the future path of interest rates to the evolution of oil prices.

Others say that, even considering that the Central Bank’s intention is to stop at 12.75% per year, the inflationary scenario will remain challenging and, as a result, force the Copom to do more.

Others say that the cycle is unlikely to end up at 12.75% because, in that case, the committee will make one last sharp move in interest rates, 100 basis points. The Central Bank typically ends tightening cycles more smoothly.

There are still concerns, in part of the market, of an exaggeration in monetary policy. But even those who believe that the Central Bank has gone too far on interest rates consider it unlikely that it will deliver a rate lower than 12.75% per year. Wednesday, interest rates rose to 11.75% per year, and the Copom explicitly signaled a new 100 bp increase, which would take the Selic to 12.75%.

BGC Liquidez presents a look at the market mood shortly after the Copom’s decision in a survey of 162 economists and traders, distributed to its clients on Thursday.

Only 16% of respondents think that the Central Bank will stop at 12.75%. The most common bet, of 42% of those who took part in the survey, is that the interest rate will rise to 13.25%. On the eve of the Copom meeting, in another survey by the BGC, with 207 participants, only 26% mentioned this percentage. End-of-cycle bets of 13%, meanwhile, shrank to 6% from 27%.

This is, however, a snapshot of the moment, and many economic analysts want to wait longer for an eventual change in their bets for the Selic rate at the end of the cycle. They say the language of the Central Bank usually changes a lot between the release of the Copom statement and the minutes. Next week, the monetary authority will also release the Inflation Report, with a press conference.

Many economists are questioning, after the Copom meeting, the technical basis and rhetoric behind the decision, so they are waiting for the Central Bank to better explain what was discussed in it.

A question mark is the fact that the committee presented projections for the price index in an alternative scenario, incorporating a good part of the oil price drop that occurred until Wednesday, to show that inflation reaches the target in 2023 without a dose of interest rate higher than 12.75% per year.

Some in the market are skeptical about that, so much so that the projections for the Selic rate have risen. There was already a questioning of the monetary authority’s calculations due to the fact that the Copom’s inflation projections are below market estimates, of 3.7%.

Another point that bothers many economists is the change in the way the Copom analyzes the balance of risks. The committee basically said that the chances of inflation exceeding expectations were lower because much of the fiscal fears had already materialized in market expectations and in the foreign exchange rate.

For some, the Copom swept some fiscal uncertainty under the carpet to avoid having an inflation forecast adjusted by the balance of risks that requires an interest rate higher than 12.75% per year.

But this may just be a concern of economists, who have a more technical view of the Copom’s decision-making process. But market operators consulted by Valor on Thursday were more comfortable with the communication, despite the large number of people who think that the interest rate will have to go over 12.75% per year.

The survey by BGC Liquidez shows a divergence in the reading of the Copom statement between economists and traders. Among economists, 69% thought the message was “dovish,” or less inclined to tightening. Among traders, this percentage is 35%.

Source: Valor International

Market expects stronger tightening after Central Bank’s decision

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After the decision of the Central Bank’s Monetary Policy Committee (Copom), on Wednesday, the market now expects the monetary tightening cycle to be even more intense than previously thought. Expectations of a Selic policy interest rate of 9% or above this level at the end of the cycle gained additional momentum and, on the other hand, projections for economic activity in 2022 are increasingly weaker.

In a survey carried out Thursday by Valor with 75 financial firms and consultancies, the median of estimates for the Selic at the end of the current high interest cycle points to the rate at 8.75%. Of the total, 44% expect the Selic to end the cycle at 9% or more. For comparison, in the survey conducted last week by the Copom with 99 participants, 27% expected the rate to be between 9% and 10% at the end of the cycle.

For analysts, the monetary authority’s statement endorsed the possibility of a longer cycle. The Central Bank pointed out that “the Copom’s baseline scenario and balance of risks indicate as appropriate to advance the process of monetary tightening further into the restrictive territory.”

“The decision confirms our scenario, with a 9.5% Selic being reached only next year. The current inflationary process really demands a more restrictive rate,” said Paulo Val, chief economist at Occam. “The risk is that expectations for 2022 will continue to worsen. It will be necessary to lengthen the cycle to counteract this movement,” he said.

In Occam’s assessment, the inflation scenario will require a continuation of monetary tightening so that a worsening of inflationary expectations in the medium term is avoided. Mr. Val, however, notes that the strategy adopted by the Copom — of not accelerating the rate of interest rate increase — “has already built in, to some extent, a somewhat slower convergence of inflation to the target.”

For Maurício Oreng, head of economic research at Santander, the Copom indicated that the adjustment variable for any surprises in the committee scenario will probably be the Selic’s total hikes budget. “For now, given the inflation simulations and the balance of risks skewed upwards, it is possible that the current flight plan includes a final Selic at something between 9% and 9.5%,” the economist wrote in a report to clients.

For Mr. Oreng, this means a higher target for the monetary tightening cycle in relation to the August Copom meeting, which would reflect “the deterioration of inflation conditions and prospects in recent weeks.” Santander, for the time being, maintains the Selic forecast at 8.5% at the end of the cycle, but highlights that it continues to perceive upward risks, although it does not see, for now, the basic interest rate in the double-digit territory.

With the Selic increase cycle towards restrictive levels, the impacts on the activity tend to be relevant. Thus, Valor also asked market economists about the projections for economic growth this year and in 2022. While in a survey carried out at the beginning of the month, the median pointed to a rise of 1.7% in the GDP next year, now the midpoint of the 75 estimates collected is a GDP of 1.5%.

JGP’s chief economist Fernando Rocha expects growth of 1.7% next year and assesses the projection as “relatively modest,” since around 1% of growth is already brought by statistical carryover.

“To have 1.7% is enough to grow 0.2% per quarter, which is a very modest rate. It could be much better,” says Mr. Rocha, mentioning as challenges the higher interest rates, the erosion of the income of the poorest families by inflation and electoral uncertainties, which can hinder investment plans. “The balance of all these things doesn’t make me too pessimistic, but doesn’t makes me too optimistic either,” he said.

Source: Valor international

Market expects 100 bp hike in interest rate next week

If the expected inflation scenario was already challenging in August, the Central Bank’s Monetary Policy Committee (Copom) will have to deal with even more complex adversities next week.

The inflationary surprise proved to be even stronger and the composition of inflation scared the market. The result was clear: expectations moved further away from the center of the target and a good part of the economists started to see the need to accelerate the pace of hikes in the Selic policy interest rate.

This week, however, Central Bank President Roberto Campos Neto managed to contain the upward movement in the projections for the next meeting of the Copom.

A survey carried out by Valor between September 13 and 16 with 107 financial and consulting firms shows that 92 of them expect a 100 basis points hike in the Selic next week, which would therefore rise to 6.25% from the current 5.25%.

In the B3’s digital options market, the “Campos Neto effect” caused bets on a 100-bp rise in the Selic to jump to 88% on Thursday from 30% on Monday, while bets on an even faster increase lost ground. Only 13 firms kept the projection of a 125-bp hike unchanged, and only two see a 150-bp hike.

During an event organized by BTG Pactual on Tuesday, Mr. Campos Neto affirmed that he will take the Selic to where it is needed, but stressed that the monetary authority will not change its flight plan with each high-frequency indicator released. The market had migrated to a scenario of accelerating the pace of tightening in the wake of higher-than-expected inflation in August and with a more worrisome and more spread composition.

Source: Valor international

Central Bank hikes rates to fight inflation

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The Central Bank’s Monetary Policy Committee (Copom) on Wednesday raised the basic interest rate by 100 basis points, to 5.25% per year from 4.25%. The decision was made unanimously.

“At this moment, the Copom’s baseline scenario and balance of risk indicate as appropriate a tightening cycle of the policy rate to a level above the neutral,” the Central Bank said in the English version of the official statement.

For the next meeting, the committee anticipates another adjustment of the same magnitude. “The Copom emphasizes that its future policy steps could be adjusted to ensure the achievement of the inflation target and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.”

After the previous meeting, when it raised the Selic to 4.25% per year from 3.5% per year, the Copom said it anticipated the continuation of the monetary normalization process with another adjustment of the same level. It added, however, that a deterioration in inflation expectations for the relevant horizon could require a timelier reduction in monetary stimulus. It also pointed out that the assessment would also depend on the evolution of economic activity, the balance of risks and how these factors would affect the inflation projections.

A survey conducted by Valor last week heard 95 financial and consulting firms, 75 of which believed in a 100 bp increase in the Selic rate at this week’s meeting, while 20 firms projected that the adjustment rate of 75 bp would be maintained.

The Copom will hold its next meeting on September 20 and 21.

Read the Copom’s full statement:

In its 240th meeting, the Copom unanimously decided to increase the Selic rate to 5.25% p.a.

The following observations provide an update of the Copom’s baseline scenario:

Regarding the global outlook, the evolution of the Covid-19 Delta variant adds risk to the recovery of the world economy. The Committee considers that, in spite of the recent movements in the yield curves, there is still a relevant upward inflation risk in the central economies. Nevertheless, the environment for emerging economies remains favorable with the long-lasting monetary stimuli, with the fiscal programs, and with the reopening of the major economies;

Turning to the Brazilian economy, recent indicators continue evolving satisfactorily and do not call for relevant revisions in growth forecasts, which display a robust economic recovery during the second semester;

Consumer inflation has been persistent. Recent indicators show a worse composition. Noteworthily, a surprise in the underlying services inflation and the continuing pressure on industrial goods, causing a rise in core measures. Furthermore, there is new pressure in volatile components, as the possible additional increase in electricity fares and food prices, both due to adverse weather conditions. Altogether, these factors imply significant revisions in short-term forecasts;

The various measures of underlying inflation are above the range compatible with meeting the inflation target;

Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are around 6.8%, 3.8%, and 3.25%, respectively; and

The Copom’s inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.15* and evolving according to the purchase power parity (PPP), stand around 6.5% for 2021, 3.5% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 7.0% in 2021, remains at this level during 2022 and drops to 6.5% during 2023. In this scenario, inflation projections for administered prices are 10.0% for 2021 and 4.6% for 2022 and 2023. The energy flag is assumed to be neutral, remaining at “red level 1” in December each year.

The Committee emphasizes that risks to its baseline scenario remain in both directions.

On the one hand, a possible reversion, even if partial, of the recent increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in the baseline scenario.

On the other hand, further extensions of fiscal policy responses to the pandemic that increase aggregate demand and deteriorate the fiscal path may pressure the country’s risk premium. In spite of the recent improvement of debt sustainability indicators, the elevated fiscal risk creates an upward asymmetry in the balance of risks, i.e., in the direction of higher-than-expected paths for inflation over the relevant horizon for monetary policy.

The Committee reiterates that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential for a sustainable economic recovery. The Copom also stresses that uncertainty regarding the continuation of the reform agenda and permanent changes to the fiscal consolidation process could result in an increase in the structural interest rate.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 1.00 p.p. to 5.25% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation, a higher-than-usual variance in the balance of risks, and is consistent with the convergence of inflation to its target over the relevant horizon for monetary policy, which includes 2022 and, to a lesser extent, 2023. The adjustment also reflects the Committee’s perception that the recent deterioration of inertial components of inflation, in a moment of reopening of the service sector, could result in an additional deterioration of inflation expectations. The Committee understands that, at this moment, the strategy of a quicker monetary adjustment is the most appropriate to guarantee the anchoring of inflation expectations. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

At this moment, the Copom’s baseline scenario and balance of risk indicate as appropriate a tightening cycle of the policy rate to a level above the neutral.

For the next meeting, the Committee foresees another adjustment of the same magnitude. The Copom emphasizes that its future policy steps could be adjusted to ensure the achievement of the inflation target and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.

The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Carolina de Assis Barros, Fabio Kanczuk, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sérgio Neves de Souza.

*Value obtained according to the usual procedure of rounding the average R$/US$ exchange rate observed on the five business days ending on the last day of the week before the Copom meeting.

Note: This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.

Source: Valor international

Analysts see Selic at 2% by end of 2020

Uncertainties over the future of the Brazilian economy will likely force the Central Bank’s Monetary Policy Committee (Copom) to keep Selic policy interest rate unchanged next week. This assessment is unanimous among the 76 financial firms heard by Valor, which also expect the Selic to be maintained at the December meeting, the last one in 2020. The projections for next year are dispersed, but there is a consensus, shared with the Central Bank itself, that the rates’ trajectory depends on the fiscal situation. For 2021, BTG Pactual foresees interest at 3%, Banco Inter at 3.5%, Credit Suisse at 4% and Pezco at 4.75%. Persevera bets on new cuts.

Source: Valor International