Financial Markets React to Central Bank’s Commitment to Inflation Control
In a significant development for Brazil’s financial markets, long-term interest rates have risen for the second consecutive day. This reflects a growing consensus that the Central Bank will need to take a more aggressive stance to meet its inflation targets.
The NTN-B bond maturing in 2033, which closed at IPCA + 6.46% yesterday, saw an increase to IPCA + 6.57%. This shift comes as market participants are still absorbing the Central Bank’s recent statement that it will do whatever is necessary to control inflation.
The Central Bank emphasized that the pace and magnitude of its rate-hiking cycle would be dictated by its unwavering commitment to aligning inflation with its targets. This will depend on the dynamics of inflation, especially its components most sensitive to economic activity and monetary policy, inflation projections, inflation expectations, the output gap, and the balance of risks.
Adding to the turmoil, the 10-year fixed-rate bond rose by 0.27 percentage points (from 12.06% to 12.34%), indicating an implicit increase in inflation expectations by 0.16 percentage points. This contrasts with yesterday’s market behavior, which saw a rise only in real interest rates.
The ripple effects were felt across other markets as well. The Ibovespa index plunged by 1.55%, while the dollar surged by 1.5%, breaching the R$ 5.50 mark once again.
Rodrigo Moraes, the CIO of wealth management at BR Partners, remarked, “It’s not just a medium- and long-term fiscal sustainability issue. There’s growing concern about short-term fiscal effects as well.” He pointed out that with fiscal policies stimulating economic activity and generating income, "it’s becoming increasingly clear that the Central Bank will have to raise rates more than previously anticipated."
Yesterday, the interest rate curve was pricing in a 0.55 percentage point hike for the next Central Bank Monetary Policy Committee (Copom) meeting on November 7 and a 0.45 percentage point increase for the December 12 meeting. Today, those expectations have shifted to 0.60 and 0.48 percentage points, respectively.
This shift in expectations led to numerous ‘stop-loss’ triggers in interest rate positions today. Traders and investors, especially foreign ones who were betting on a rate cut, have been forced to abandon their positions, further intensifying the uptick in rates.
Moraes also noted that recent widespread fires in the country are causing market participants to question if this could impact inflation indirectly, particularly through potential increases in energy tariffs.
Adding to the market’s volatility is the forthcoming bi-monthly government report on revenues and expenditures, set to be released later today. Given that current budget projections are not being met, the market is bracing for potential announcements of spending cuts.
Stay tuned for further updates as these developments continue to unfold.
For more details on BR Partners, visit their official website.
