In the latest Focus Report compiled by the Central Bank, in conjunction with leading investment firms, indicates that the era of monetary easing appears to be drawing to a close in Brazil. An overwhelming majority of market agents surveyed (93%) do not anticipate further interest rate cuts during the policy meeting later this week.
Pessimism is discernible in the latest median predictions for end-of-year benchmark interest rates, the inflation index, as well as projected economic growth for 2024.
Amid growing market sentiment that Brazil’s Selic rate is likely to hover around the current level of 10.5% by year-end (up from the previous week’s 10.25%), there is an overall deterioration in investor expectations. Inflation expectations have been marginally adjusted upwards from 3.9% to 3.96%. Looking back five weeks, the market had anticipated a year-end inflation rate of 3.76%.
These trends were somewhat predictable following the surprise surge in May inflation, largely attributed to rising food and energy costs. Consequently, the index has surged by 3.93% over a 12-month period.
Notably, the disaster in Rio Grande do Sul, characterized by widespread floods in May which affected almost 80% of its municipalities – has begun to influence inflation data. With agricultural output being negatively impacted, secondary effects have rippled throughout regional production chains.
Despite these challenges, several economists envisage potential benefits from the state’s reconstruction efforts. This is evident in expectations of a possible stimulus in the economy, from the release of direct emergency aid to affected groups, to hefty infrastructure investments earmarked for road reconstruction and other public facilities.
Investor sentiment continues to wane as expectations for GDP growth have been slightly adjusted downwards from 2.09% to 2.08%.
This gloomy scenario, depicted in the Focus Report, has led to a lackluster day on the Brazilian stock market. The Ibovespa index has been on a downward trajectory since ringing the opening bell. Ascendancy in macroeconomic uncertainty, skepticism about the government’s fiscal targets, and an unfavorable global climate have contributed to the Ibovespa’s slump from record highs, registering it as one of the worst-performing stock indexes among the world’s leading economies.
The Brazilian real has not been spared, as it too continues on a declining path. Besides the Japanese yen, the Brazilian real has fared the worst in a basket of 16 global currencies for 2024, as per Bloomberg data.
Investors’ risk perception of the Brazilian economy has escalated quite rapidly. During this period, the 10-year bond yield – a fundamental barometer for most other borrowing activities and a key indicator of trust in the country – has shot up from 10.36% at the beginning of the year to currently standing at 12.03%.
