The latest Focus report, a weekly survey by the Central Bank of top-rated investment firms, confirms the near-consensus perception that Brazil’s monetary easing is over. 93 percent of market traders do not believe the bank will cut interest rates at this week’s policy meeting.
Average forecasts for the base interest rate at the end of the year and the inflation index have worsened, as has the projection for the country’s economic growth in 2024.
Markets believe the Selic rate will end the year at the current 10.5 percent — up from 10.25 percent a week ago.
Meanwhile, investors also adjusted their inflation expectations: from 3.9 to 3.96 percent. Five weeks ago, markets expected inflation to end the year at 3.76 percent. This deterioration in expectations was anticipated after May’s inflation data saw a faster-than-expected rise in consumer prices – driven mainly by food and energy costs. In 12 months, the index has increased by 3.93 percent.
The tragedy in Rio Grande do Sul is also finally starting to weigh on inflation data. Nearly 80 percent of its municipalities were hit by floods in May. In addition to contributing to the decline in agricultural production, there are secondary effects related to the production chains in which countries participate.
On the other hand, many economists also expect a boost to the economy coming from the state’s reconstruction efforts, from direct emergency aid given to affected populations to infrastructure investments to rebuild roads and other public logistics facilities.
Investors also slightly lowered their expectations for GDP, from a growth rate of 2.09 to 2.08 percent.
The negative focus report led to a bad day on Brazil’s stock market, with the Ibovespa index down since the opening bell. In fact, uncertainty around macroeconomic indicators, the government’s real ability to meet its fiscal targets and a challenging global scenario have pushed the Ibovespa from all-time highs to the worst-performing stock index among major economies of the world.
This has also been the case for Brazil’s currency – which has been on a downward trajectory recently. Only the Japanese yen has performed worse this year than the Brazilian real in a basket of 16 global currencies, according to Bloomberg data.
Investors’ risk perception of the Brazilian economy has deteriorated rapidly. The yield on the country’s 10-year bond — essentially what financial markets would charge the Brazilian government to borrow for ten years — has risen from 10.36 percent on Jan. 1 to 12.03 percent now.
The 10-year yield is a basis for most other borrowing activities and is an important gauge of confidence in the country.
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Image Source : brazilian.report