Market has discussed need for rate hike in last weeks
08/28/2024
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Igor Velecico — Foto: Silvia Costanti/Valor
The mounting uncertainty regarding the direction of monetary policy has been significant in recent weeks. The perception of an economy resistant to slowing down has joined the U.S. dollar’s appreciation against the real this year, supporting a growing view that the Central Bank will be forced to resume monetary tightening in September.
Alongside this perception is the recent communication from some Central Bank officials, particularly directors Gabriel Galípolo (monetary policy) and Diogo Guillen (economic policy).
Before the interest rate decision in July, few analysts projected new increases in the Selic policy interest rate, such as XP Asset Management and Novus Capital. After the policy meeting, the scenario gained significant supporters including Legacy Capital, Itaú Asset Management, and ASA. More recently, some sell-side players have also adopted this scenario, including XP and BTG Pactual.
However, there remains some uncertainty on the radar. Not by coincidence, although the interest rate curve and the COPOM digital options market continue to indicate a majority chance of the Selic tightening cycle beginning in September, the consensus in the Focus—Central Bank’s weekly survey with economists—still puts the policy rate at 10.5% per year, although the average of projections has increased.
In recent days, banks like Barclays, J.P. Morgan, and Morgan Stanley reaffirmed their projection that the Selic will remain at 10.5% per year.
The appreciation of the Brazilian real since the peak of stress, when the exchange rate reached R$5.86 per dollar, and the expected economic slowdown are cited by those who reject the view that an interest rate hike is necessary. Additionally, an imminent easing of the U.S. Federal Reserve’s policy would also factor into the equation.
Valor spoke with two market participants with differing views on the necessity of a process to raise the Selic starting in September, as has been priced in the market rates for some time now.
Igor Velecico, Genoa Capital’s chief economist, has adopted a scenario in which the Central Bank raises the policy interest rate by 25 basis points in September, reaching 12% per year by early 2025. According to him, the resumption of tightening is necessary, as the context encompasses an economy that is not in equilibrium. “And this generates inflation,” he said, projecting 12-month IPCA (Brazil’s official inflation index) at 4.3% this year and 4.2% in 2025.
“The Central Bank will gain credibility if it does the right thing. The right thing to do at the moment is to raise interest rates to address domestic imbalances and bring inflation closer to the target of 3%,” said the economist, who sees an “overheated” economic activity in the country.
On the opposite side, the chief strategist at Warren Investimentos, Sérgio Goldenstein, sees no need for an additional tightening of interest rates and projects the Selic to remain at 10.5% per year for a longer period.
“If the Central Bank promotes a cycle of a 150- to 200-basis-point increase [in the Selic], its model, over the relevant horizon, will point to an IPCA projection of 2.7%. Instead of initiating a tightening cycle only to soon have to start a cutting cycle, it seems much more coherent to keep the Selic stable, with a strong discourse,” argues the professional, who previously headed the monetary authority’s open market department.
*Por Gabriel Roca, Victor Rezende — São Paulo
Source: Valor International