The latest Focus Report, a weekly survey by the Central Bank with top-rated investment firms, confirms the near consensual perception that Brazil’s monetary easing is over. A whopping 93 percent of market agents don’t believe the bank will cut interest rates in this week’s policy meeting.
The median forecasts for the year-end benchmark interest rate and inflation index have worsened, as has the projection for the country’s economic growth in 2024.
Markets believe the Selic rate will close the year at the current 10.5 percent — up from 10.25 percent a week ago.
Meanwhile, investors also adjusted their expectations for inflation: from 3.9 to 3.96 percent. Five weeks ago, markets expected inflation to close the year at 3.76 percent. This deterioration in expectations was anticipated after May inflation data saw a faster-than-expected surge in consumer prices — driven mainly by food and energy costs. In 12 months, the index is up by 3.93 percent.
The tragedy in Rio Grande do Sul is also finally starting to affect inflation data. Nearly 80 percent of its municipalities were hit by floods in May. Besides contributing to a drop in agricultural output, there are secondary effects related to the production chains in which the states participate.
On the other hand, many economists also expect some boost in the economy coming from the state’s reconstruction efforts, from direct emergency aid being released to affected populations to infrastructure investments for the reconstruction of roads and other public logistic facilities.
Investors have also slightly lowered their expectations for the GDP, from a growth rate of 2.09 to 2.08 percent.
The negative Focus Report has led to a poor day in Brazil’s stock market, with the Ibovespa index down since the opening bell. As a matter of fact, uncertainty around macroeconomic indicators, the government’s true ability to meet its fiscal targets, and a challenging global scenario have dropped the Ibovespa from all-time highs to being the worst performing stock index among the world’s top economies.
That has also been the case for Brazil’s currency — which has been on a downward trajectory as of recently. According to Bloomberg data, only the Japanese yen has performed worse this year than the Brazilian real among a basket of 16 global currencies.
Investors’ risk perception around the Brazilian economy has deteriorated fast. The country’s 10-year bond yield — basically what financial markets would charge the Brazilian government to borrow for ten years — has jumped from 10.36 percent on January 1 to 12.03 percent now.
The 10-year yield is a foundation for most other borrowing activity and is an important gauge of trust in the country.
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