RIO DE JANEIRO, BRAZIL – Although widely expected, the increase was justified by a statement perceived by analysts as less harsh than the communication adopted by the monetary authority up to now.
According to the Central Bank’s monetary policy committee (COPOM), the signaling of a lower increase ahead reflects the current stage of the tightening cycle, whose cumulative effects will be felt throughout the relevant period of 2022 and “to a greater extent” in 2023.
Nevertheless, COPOM reiterated that it believes it is appropriate for the monetary tightening cycle to “advance significantly in contractionary territory” and that it will “persevere” in this strategy until the anchoring of expectations is consolidated.
The yield curve is pricing a deceleration to 1 percentage point, but a number of analysts concede that the increase could be even lower, amid weak GDP growth, Covid-related uncertainties and the lagged effects of the monetary tightening cited by the Central Bank. Some economists even expect an end to the cycle in the upcoming meeting.
In reaction to indications of a slowdown in the tightening cycle, short-term interest rate futures contracts should see a downward adjustment. On the other hand, the dollar may be under more pressure.
WHAT ANALYSTS SAY:
Goldman Sachs Chief Economist for Latin America Alberto Ramos:
- COPOM was slightly more dovish than expected;
- Goldman expects a 1 percentage point hike in March;
- A more moderate rate hike in March would be justified by weak GDP, an uncertain Covid scenario, lagged effects of the recent monetary tightening and a better anchored Brazilian Real;
- The Central Bank is starting to place more weight on 2023 inflation.
BofA head of economics in Brazil and strategy for Latin America David Beker:
- The Central Bank was more dovish than the market; expected, but in line with BofA’s view that the end of the tightening cycle is near;
- The Central Bank mentioned the stage of the cycle and the cumulative effects;
- Forecasts a final 0.50 percentage point hike in March.
Barclays economist for Brazil Roberto Secemski:
“The decision was in line with what we expected, paving the way for a lower hike in March, considering the stage of the tightening cycle and the fact that the cumulative effects of previous hikes have not yet been felt by the economy.”
“In any case, there was no clear indication at the end of the cycle itself, with some emphasis on upside risks and adverse readings in core inflation.”
Greenbay Investimentos CIO Gustavo Brotto:
“The most important part of the statement is the signaling of a slowdown in the pace of adjustment for the next meeting; the yield curve should give way with this indication.”
“The relevant horizon, as expected, takes into account the year 2023 to a greater degree than 2022.”
“We believe that the next COPOM meeting is likely to end the current monetary tightening cycle.”
Occam Brazil partner and manager Pedro Dreux:
“A well-anticipated decision, but the signaling of the next steps was softer than the market had anticipated.”
“When the Central Bank doesn’t qualify the reduction in the pace of adjustment as moderate, the indication for the March COPOM is that the deceleration should be for 100 basis points or less.”
MB Associados chief economist Sergio Vale:
Sees a 1 percentage point hike at the next meeting as likely and perhaps another 0,50 pp at the next.
“Scaling, but still coming in at 12.25%.”
“The exchange rate is improving, but the commodities scenario is complicated.”
Asa Investments chief economist Gustavo Ribeiro:
Emphasis on the substantially revised upward conditional projections in 2022 and remaining around the target in 2023, despite a more appreciated Brazilian real, and the prospective signaling of a reduction in the pace at the next meeting.
“We expected the Central Bank to maintain flexibility, not signaling the next step; it adds to the chance that the Central Bank will need to continue the cycle beyond the March meeting.”
Meraki chief economist Rafael Ihara:
“The decision came in line with expectations; the doubt was only the signaling for the next meeting and the Central Bank chose to explicitly signal a reduction in the pace of adjustment.”
“We believe the next move will be a 100 basis point hike and a final 50 basis point hike in May, when the Central Bank will be looking only at 2023 inflation, which is on target in its models.”
Rio Bravo Investimentos economist João Leal:
“The COPOM was dovish in its statement, it wants to wait to see the impacts of the interest rate hike.”
“The Committee is still concerned about inflation, particularly with underlying items.”
“We expect the hike cycle to end in March with a 100 basis point hike.”
CM Capital chief economist Carla Argenta:
The market should react somewhat positively due to the readjustment of the Central Bank’s tone on the next monetary policy steps, with some correction of the yield curve.
“Given the expected drop in interest rates and the monetary tightening trend in developed countries, we expect the dollar to go in the opposite direction and open upwards.”