Brazil’s swap rates rose after the central bank sent a hawkish message to investors, reminding them that a final interest rate increase remains on the table even as most traders bet its aggressive monetary tightening campaign ended last month.
(Bloomberg) — Brazil’s swap rates rose after the central bank sent a hawkish message to investors, reminding them that a final interest rate increase remains on the table even as most traders bet its aggressive monetary tightening campaign ended last month.
“We need to send out a hard message,” Roberto Campos Neto, the bank’s president, said at an event organized by local newspaper Valor Economico late on Monday. “The message that’s still valid is that we’ll evaluate the need for a final rate hike” in September.
Rates on the belly of the curve rose more than 30 basis points on Tuesday, while those at the short end of the curve were up 5 to 10 basis points.
Campos Neto added that the central bank isn’t thinking about rate cuts yet. “We’re still thinking about finishing our work” of bringing inflation back to target.
Most traders had largely dismissed chances of additional monetary tightening after a campaign that has already added 11.75 percentage points to borrowing costs since March 2021. With the Selic currently at 13.75%, economists are discussing when rate cuts may start, as the central bank forecasts three consecutive months of deflation resulting from large fuel tax cuts.
Still Concerned
Yet policy makers remain “vigilant” and “concerned” about key inflation components such as services and salaries, Campos Neto said. Stronger-than-forecast growth in the second quarter is keeping domestic demand strong.
Speaking after Campos Neto on Tuesday, Monetary Policy Director Bruno Serra reinforced that policy makers will discuss the need for an additional rate hike this month as it’s too early to say the inflationary shock is easing either domestically or globally.
“It seems inconsistent to have inflation forecasts above target and discuss rate cuts at the same time,” he said at an event organized by Bradesco Asset Management.
As the monetary authority still awaits a sharp economic slowdown to help bring consumer prices back to target, rising inflation expectations for 2024 are “worrisome,” he added. Swap rates, which indicate investor bets on the key rate, rose further after Serra’s comments.
“We’ve been surprised already so much by this inflationary shock that we have to remain cautious,” he said.
Read More: Brazil’s Growth Surprise Boosts Economic Outlook Ahead of Vote
Economists surveyed by the central bank revised up their inflation estimates for 2024 this week, although they lowered forecasts for this year and next. Most still see consumer prices rising above target through 2024.
(Updates with central bank director comments starting in 7th graph, market prices in third paragraph)
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