(Bloomberg) — A hawkish message from Brazil’s central bank is expected to lift the real as policymakers seek to tame inflation expectations and restore investor confidence following a market rout.
The central bank accelerated the pace of interest-rate hikes to 100 basis points from 50 basis points on Wednesday, in an expected and unanimous decision that took the benchmark Selic rate to 12.25%. But its guidance took some investors by surprise as it signaled two additional increases of the same magnitude for the January and March meetings.
It’s “clearly a shock and awe decision,” said Dan Pan, an economist at Standard Chartered Bank. The move “should send a stronger signal on safeguarding monetary credibility and anchoring market expectations, especially given the ongoing fiscal and political uncertainties.”
The decision was announced when local markets were closed. An exchange-traded fund tracking Brazilian equities edged up in after-hours trading in New York. The Brazilian real is likely to open higher and could strengthen to past 5.80 per US dollar at Thursday’s open, according to Jefferies.
The currency closed at 5.9647 per dollar Wednesday. Year-to-date, it’s still down 19%, including a recent selloff that left it at a record low.
Going into the meeting, traders were pricing in a 100 basis-point hike in December and another similar increase in January. It was also the final meeting for Governor Roberto Campos Neto, who’s set to be replaced by Gabriel Galipolo.
Here’s what others on Wall Street are saying about Brazil’s rate decision:
Bret Rosen, economist and strategist for Latin America at EMSO Asset Management“What stands out from the decision was not just the 9-0 vote but the forward guidance that mentions BCB’s intent to do two more hikes of the same magnitude. This represents a hawkish twist and should help anchor inflation expectations somewhat”Alberto Ramos, chief economist for Latin America at Goldman Sachs“A very sensible and hawkish” decision that “will help to control the slide of the BRL and inflation expectations”“The Copom did not hide. It was quite explicit in mentioning that the poor perception of the fiscal has a relevant negative impact on asset prices, expectations, which leads to more adverse inflation dynamics”Olga Yangol, the head of emerging markets research and strategy at Credit Agricole“Guidance is slightly more hawkish than our previous forecast” and the Brazilian real should outperform ThursdayBertrand Delgado, director for research and strategy at Societe Generale“It sends a message to the administration that they need to come up with some kind of fiscal adjustment”Incoming BCB chief Galipolo “is sending a strong message that they could do anything and that is the way to go at the moment in Brazil”Brad Bechtel, global head of FX at Jefferies:“Brazil’s central bank went big”Decision should be enough to keep USD/BRL below 6.00 and it’s likely to open below 5.80“A bazooka was needed and that is what was delivered”Jennifer Gorgoll, portfolio manager for emerging-markets corporate debt at Neuberger Berman“We think this presents headwinds for Brazilian corporates, especially those companies that are dependent on local debentures to provide financing as it causes rates to be higher and a greater interest burden on the companies.”
–With assistance from Carolina Wilson, Giovanna Bellotti Azevedo, Leda Alvim and Michael O’Boyle.
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Publish date : 2024-12-11 10:03:00
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