Brazilian real rises to highest level since June on positive signals from central bank
The Brazilian real rose to its highest level since last June on Thursday after central bank policymakers kept interest rates unchanged and expressed concern over the prospect of higher inflation, driven by tensions with Luiz Inacio Lula da Silva’s government.
Monetary policymakers kept the benchmark Selic rate at 13.75% for the fourth straight time on Wednesday, as expected.
However, the statement was widely seen as restrictive in tone, as policymakers indicated that they would analyze whether holding rates steady “for longer” than expected would slow inflation to the proposed level.
“The prevailing situation, especially with uncertainty on the fiscal side and with the inflation outlook moving away from the longer-term target level, requires further consideration in assessing risks,” they said.
“In the Committee’s view, this situation raises the cost of so-called disinflation, which is indispensable to achieve the objectives” set for the coming years.
On Thursday, the real surpassed five reais to the dollar for the first time since last June.
Swap rates on the contract expiring in January next year, which point to the markets’ outlook for monetary policy at the end of 2023, registered a rise of 10 basis points.
“Investors are giving the central bank a lot of credibilities,” said Sergio Zanini, a partner at Galapagos Capital. “Their statement was important to defend their mandate and their independence.”
Policymakers led by Roberto Campos Neto are battling rising cost-of-living expectations that make it harder to justify rate cuts, even as annual inflation has steadily declined in recent months to 5.87% from last year’s peak of more than 12%.
Tax cuts and restrictive borrowing costs have driven the decline, but fuel prices are rising as core measures that eliminate the most volatile items accelerate.
The Federal Reserve slowed the rate hikes earlier on Wednesday but said more hikes were expected.
Regionally, policymakers from Mexico to Colombia continue to hike, while Chile’s central bank president, Rosanna Costa, has opposed investor bets on the start of an easing cycle.
In an outlook that considers rate cuts starting in September, as shown in its weekly survey of economists, Brazil’s central bank sees consumer price increases above the ceiling of its tolerance range in 2023 and above the target next year.
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This article was produced by The Rio Times’ automated newsroom system. How we use AI · Report an error · Editorial responsibility: Matthias Camenzind, Editor-in-Chief