Survey carried out by Valor shows that only one out of four market participants expect a 25-basis-point hike in key interest rate Selic on Wednesday

09/19/2022

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Despite Central Bank directors’ hawkish tone in recent weeks and the evidence that monetary tightening in developed economies will gain steam, most investors believe that the monetary tightening cycle in Brazil has come to an end. Even so, the recent de-anchoring of inflation projections for 2024 and the high levels of inflation cores still make one out of four market participants expect a 25-basis-point hike in the Selic, Brazil’s key interest rate, on Wednesday.

According to a survey conducted by Valor with 109 financial firms, 82 of them expect the Central Bank to keep interest rates unchanged at 13.75% in this week’s policy meeting. The other 27 still expect a residual 25-basis-point hike, to 14% per year, at the end of the cycle.

The data reinforced the hypothesis that after Wednesday’s meeting, interest rates will remain unchanged by the end of the year. The Central Bank’s Monetary Policy Committee (Copom) will meet two more times in this period. Only two of the 108 firms see new adjustments in the October and December.

The view that the tightening cycle in the country could be very close to the end was quite consolidated after the Copom’s last decision, when the policymakers said that they would evaluate “the need for a residual adjustment, of lower magnitude, in its next meeting.” However, some people in the market believe that recent remarks by Central Bank President Roberto Campos Neto and monetary policy director Bruno Serra brought back the possibility of an extension of the cycle on Wednesday.

“My impression was, initially, that the tough tone was designed to only ease early pricing of cuts. But then came Bruno Serra’s speech, saying that it was necessary to be cautious with the eventual end of the cycle. These were clear signs that there is a 25 bp hike on the table, and the probability is not irrelevant. Before that, in my view, the end of the cycle was given. But the 0.001% chance became 20% or 25% chance of happening,” said Juliano Ferreira, the chief economist of BGC Liquidez.

Yet, he said that the Central Bank will only deliver the last 25 bp hike if it believes this would be the clearest message to the market that it will take longer to start its easing cycle. “I don’t think it would be the right instrument. It is possible to stop in a hawkish way,” he said.

Leonardo Costa, an economist at ASA Investments, recalled that it will be important to monitor Central Bank’s new inflation projections, which are likely to show a slowdown in 2022 and 2023 after the government eased the tax burden on regulated prices and a higher projection for 2024. In the last Copom meeting, the monetary authority projected the IPCA (Brazil’s official inflation index) in 2024 at 2.7%, below the 3% target for that year. This projection is expected to be revised to around the target, the economist said.

“Our perception, since the last Copom meeting, is that there was a deflationary movement, and there is a perception of a little lower inflation. On the other hand, expectations for 2024 are still concerning. This should give subsidies for the Central Bank to interrupt the cycle at 13.75%, even if it maintains a hawkish tone of vigilance and indicates the maintenance of interest rates for a long period of time,” Mr. Costa said.

The view is similar to that of Júlia Gottlieb, an economist with Itaú Unibanco. According to her, since the last Copom meeting, the inflation dynamics have been benign, and the Central Bank’s inflation projections for 2022 are likely to slow down to 6.1% from 6.8%, reducing the risk of inertial inflation in the following year.

“With this, it does not need to make a residual hike along the lines of what was addressed in the last statement. In relation to signaling, it may indicate that it will make a stop, but that the broad economic situation prescribes a still substantially contractionary policy, and that the Copom should remain vigilant,” she said.

According to the survey carried out by Valor, the median of the 106 projections for the IPCA in 2022 was 6.1%, while the average point of the estimates (105) for the IPCA in 2023 reached 5.1%. As for 2024, the median of the 91 projections collected was 3.5%, the same level as that seen in the survey conducted before the last Copom meeting, in August.

Eduardo Yuki — Foto: Ana Paula Paiva/Valor

Safra’s senior economist Eduardo Yuki also expects the Central Bank to keep rates unchanged at Wednesday’s meeting, but sees the need for a tough tone from the authority.

“The statement may reiterate the Central Bank’s vigilance of inflation expectations, signaling a very firm stance. It may also indicate the need to maintain the Selic rate at a contractionary level for a sufficiently prolonged period, aiming to anchor inflation expectations for 2024. Thus, we expect an austere statement,” he said.

Even the part of the market that evaluates that the continuity of the monetary tightening cycle is the best strategy for the Central Bank acknowledges that an eventual increase of 25 bp in the Selic rate would not make a big difference from the economic standpoint, but that it would send an important message.

Gustavo Arruda, head of Latam research at BNP Paribas, believes that it is still early to declare victory over inflation and, in a scenario of mounting uncertainties, both here and abroad, a conservative tone from the Central Bank would be the most appropriate.

“If it stops [raising interest rates], will it be a mistake? I have the impression that it would not. Most of the cycle has already gone, and we are discussing the details. But I like to look more at the balance of risks and I think that if it stops, it will take more risks. If there is a possibility of the Central Bank needing to raise interest rates again after announcing the pause, it is better to continue with small hikes, since the cost would be lower,” he said. Mr. Arruda expects a 25 bp hike in the September meeting, and that the Selic rate will end the year at 14.25% — a projection that may be revised depending on the Copom’s statement on Wednesday.

José Pena, the chief economist of Porto Investimentos, said that recent remarks by Central Bank President Roberto Campos Neto and monetary policy director Bruno Serra were more directed at combating market expectations of early cuts in interest rates, rather than signaling an intention to extend the monetary tightening cycle.

The economist, whose baseline scenario includes cuts only in the middle of the second half of next year, said that the activity data released by the statistics agency IBGE last week unveiled positive signs that the Central Bank may find conditions to cut interest rates a little sooner than expected.

“Retailers faced a widespread drop, but credit-sensitive sectors, such as durable goods, suffered more. These are signs that the monetary tightening is starting to show its effects,” he said. According to Mr. Pena, the services sector, which, unlike retail, surprised positively, is less dependent on credit and more dependent on income, which was recently boosted by government handouts and the labor market.

“We may have, at the turn of the year, a scenario of lower domestic activity, with clearer effects of monetary policy on the activity and with the added benefit of the Central Banks abroad tightening more and reducing imported inflation,” the economist of Porto Investimentos said, estimating that, if the described scenario is confirmed, the cycle of cuts may begin at the turn of the first to the second half of the year.

According to the survey carried out by Valor, the median of the participants’ projections for the Selic rate at the end of 2023 is 11%, the same level as the previous survey.

Regarding the more intense monetary tightening cycle in developed markets, the economists consulted by Valor do not believe that, for now, an additional interest rate hike in the United States, in relation to what is currently priced in the market, has the potential to change the Brazilian Central Bank’s flight plans.

“Today, the market is pricing a final rate between 4.25% and 4.5% [in the U.S.]. Even if it is a little higher, I don’t believe that this would derail the real and force the [Brazilian] Central Bank to raise interest rates again”, the economist from Porto Investimentos said.

*By Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/