JPMorgan Chase & Co. (JPM) joined the banks that expect Brazil’s benchmark interest rate to rise to at least 14% this year due to fiscal stimulus and predictions of higher inflation in Latin America’s largest economy.
Monetary policymakers, led by Brazilian central banker Roberto Campos Neto, will raise the Selic rate by half a percentage point on August 3 and then leave the door open to a 25 basis point increase in September, analysts Casiana Fernandez and Vinicius Moreira wrote in a note. They had previously projected that the tightening cycle would stop next month.
“While we remain convinced that the Brazilian economy will slow sharply, we are less convinced of the timing of this weakening,” they wrote.
Central bank members are finishing their aggressive rate hike campaign as analysts bet that a slowdown in activity later this year will help bring inflation above 11% under control.
Still, labor market indicators and confidence levels show signs of improvement. On top of that, expectations for consumer prices in 2023, the central bank’s primary focus, continue to rise.
“The timing is important, particularly for a central bank seeking to regain credibility and control medium-term inflation expectations that continue to rise, along with high core inflation and fiscal de-anchoring,” JPMorgan analysts wrote.
President Jair Bolsonaro, in second place in polls heading into October elections, won congressional approval for a multibillion-dollar social program that includes higher payments for the poor.
Recent fuel tax cuts are helping to reduce transportation costs in July, although they could push up prices later.
Amid pressure for fiscal stimulus, some banks, including Credit Suisse, Santander, and BNP Paribas, are betting on at least one more hike after the August 3 rate meeting, with some predicting the cycle will extend into October. Traders are also betting on smaller increases beyond next month.
With information from Bloomberg