Political risks, higher inflation should push interest rates up further

Brazilian bonds saw a steep spike in yields this morning, as investors adjusted their expectations following the highest inflation rate for August in 21 years and heightened political risks. Short-term interest rates were topping 7 percent yields, after national statistics bureau IBGE pegged August’s official inflation rate at 0.87 percent, above consensus estimates of 0.7 percent. Over the last 12 months, consumer prices have already shot up 9.68 percent.

The data suggests the market is already expecting a more accelerated monetary tightening process, ahead of the Central Bank’s meeting on September 21 and 22. Currently, Brazil’s Selic benchmark interest rate lies at 5.25 percent. 

Politics also have an impact, as Brazilian assets have been distressed since last week in anticipation of the September 7 protests. Now, investors carefully monitor president Jair Bolsonaro’s meeting with truck driver representatives, in an attempt to avoid another strike that could have catastrophic effects on an already ailing economy.

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