Market Wire - Real Rides on Global Risk as Brazil Delivers Expected Rate Hike
Karthik Sankaran, Senior Market Strategist, email@example.com
In line with expectations, Brazil’s central bank raised its benchmark Selic interest rate by 100 basis points to 11.75 percent and said an equivalent increase would likely be justified when it meets again in May. The bank said front-loading rate hikes would help achieve “inflation convergence to levels around the target over the relevant horizon”.
According to projections supplied with the decision, the central bank now expects inflation to hit 7.1 percent in 2022 (jumping from 5.4 percent at its last meeting on February 2), and 3.4 percent in 2023 (only a slight increase from the previous 3.2 percent). In its reference scenario, interest rates are seen topping out at 12.75 percent - slightly lower than the 13.75 percent reflected in the futures curve.
Policymakers counselled patience, saying: “the moment requires serenity to assess the size and duration of the current shocks,” while signalling a willingness to adjust the size of the tightening cycle if larger or more persistent downside pressures were to hit the Brazilian economy.
In our view, by hiking and promising more to come, Brazilian policymakers are unlikely to see the loss in hawkish credibility that might otherwise accompany a lowering in terminal rate expectations. Still, the real’s performance will depend not just on the central bank’s own actions but also how broader risk sentiment responds to developments in Ukraine and policy support for the Chinese economy.