Brazil's currency firmed and interest rate futures jumped on Thursday as a more hawkish outlook from the central bank led economists to push back forecasts for rate cuts to next year.
The central bank's policy statement was a setback for newly inaugurated President Luiz Inacio Lula da Silva, who has blasted the level of interest rates - maintained at a six-year high of 13.75% on Wednesday - as an obstacle to economic growth. The Brazilian real strengthened in Thursday trading past 5.00 per dollar for the first time since June 2022, while the short end of the yield curve traded up sharply, pricing interest rates at higher levels through 2026. The central bank on Wednesday signaled that they were considering holding interest rates at current levels for longer than markets expect, citing inflation expectations drifting away from target amid uncertainties linked to fiscal expansion sponsored by Lula. "We can pretty much forget about any easing action in the monetary front in 2023," said economist Alexandre Schwartsman, a former central bank director.
William Jackson, chief emerging markets economist at Capital Economics, said the policy statement made clear that the central bank is increasingly concerned that inflation will not cool fast enough, hinting at stable rates into 2024. "We recently pushed back the timing of the first rate cut in our profile to the fourth quarter, which is later than most expect. But the risk is that policymakers may not even cut at all this year," he added.
UBS BB analysts revised their outlook for the benchmark Selic rate to end this year at 12.25% from 11.25% before. XP and Credit Suisse analysts said the more aggressive tone from the central bank reinforced their view of the Selic on hold at 13.75% until the beginning of next year. (Reporting by Marcela Ayres in Brasilia; Additional reporting by Luana Maria Benedito; Editing by Brad Haynes and Mark Porter)
