Political crisis dampens expectation of aggressive monetary easing

The escalation of the political crisis caused by the testimonies of brothers Joesley and Wesley Batista, of meat giant JBS, has contaminated the prospects of monetary easing. A decline of the Selic policy interest rate is not at risk, but the pace and the length of this drop have been rebalanced. Two weeks ago many observers were expecting the Monetary Policy Committee (Copom) to accelerate the easing with a 125-basis-point cut in this week’s meeting.

Such bet has been abandoned because of the instability in markets after the plea bargain of the J&F owners. Of 41 analysts of banks and consultancies surveyed by Valor, 35, or 85.3%, now bet on a 100-basis-point cut, which will take the Selic to 10.25%. Five project a 75-basis-point cut. Only one expects a 125 cut — still insufficient to bring the rate to the single digit.

Economists and heads of trading at banks, with strong presence in trades of rate derivatives, have not yet priced in their projections the possibility of an institutional disruption in the country. They contemplate the increasingly probable switch at the Palácio do Planalto, with President Michel Temer leaving. However, the clout of a successor capable of prioritizing the structural reforms even during a stopgap tenure — until the 2018 elections — is likely to be incorporated into the calculations and may alter the expectations for the monetary easing that began last October.

In seven months, the base rate fell 300 basis points — to 11.25% from 14.25% — and will continue falling, authorized by the disinflation that is bringing the Extended Consumer Price Index (IPCA) down to less than 4% in 12 months, but analysts don’t dare making forecasts for the end of this process of adjusting the rate policy to the current scenario. It is clear, however, that the enthusiasm of economic agents who until recently saw room for the Selic at 7% in December has cooled down.

The risk now comes in the opposite direction, with experts more inclined to adjust their estimates to a smaller cut. For now, caution informs the longer-term projections. The current survey, compared to the one conducted in April, shows slight alterations in the Selic estimates for 2017 and 2018.

In the survey concluded on the 26th of May, 27 of the 40 experts (65.8% of the total) expect a Selic between 8.5% and 9% by the year’s end. In the prior survey, 77.3% of the bets for the same period concentrated between 8% and 8.75%. For 2018, in the current survey, 31 of 40 analysts (75.6%) estimate a Selic between 8% and 9%. In April, 92.7% of the surveyed projected Selic between 8% and 8.75% for the end of next year.

The suspension of cuts is one possibility raised in the market for the Central Bank to be able to reassess the scenario.

For the next few months, the economist bets on three scenarios: Mr. Temer doesn’t resign and stays in the presidential palace; ouster by the Supreme Electoral Tribunal (TSE) or impeachment — the Copom could reduce the Selic by 100 basis points also in July, to 9.25%; with Mr. Temer’s term annulled by the TSE, the likely winners of the indirect election would signal support for the reforms and maintenance of Finance Minister Henrique Meirelles, which would lead the Selic to 8% by this year’s end, and to 7.25% in 2018; maintenance of Mr. Temer, but with a return of robust political support, would also favor a Selic at 8% until December, and 7.25% in 2018.

Source: Valor Econômico