Fed eases interest rate hikes and gives BC time to adjust Selic – 05/04/2022

Despite having promoted the biggest hike in more than 20 years in its benchmark interest rate, raising it by 0.5 percentage point, to 0.75% to 1%, this Wednesday (4), and starting as the resources injected into the economy were reduced, the Fed (Federal Reserve, American central bank) sent a message that it will maintain a cautious monetary policy throughout 2022. As a result, financial markets breathed more relieved and the main stock market indices still open — the American and the Brazilian among them — turned from a fall to a rise.

With the adoption by the Fed of a position considered more lenient in relation to the future (“dovish”, in financial market jargon), it was difficult for the Brazilian Central Bank not to confirm the expectation that it would raise the basic interest rate (Selic rate) by 1 percentage point. The unanimous decision took the Selic from 11.75% to 12.75% nominal per year.

However, bets increased that, unlike the messages that were being transmitted by its directors, the BC will not end the cycle of hikes in basic interest rates in May, extending it at least until June. The upward cycle, which began in March 2021, would continue with an adjustment of Brazilian interest rate policy to the Fed’s pace.

In principle, the expectation is for another increase of 0.5 point, parking the Selic at 13.25%, next month. In the communiqué issued at the end of the meeting, the Copom (Monetary Policy Committee) endorsed these expectations. With a slower rate of increase in the US interest rate, the Brazilian Central Bank buys time to adjust the base rate and maintain the dollar exchange rate at the BRL 5 border.

Turnovers in the trading sessions were strong. US stocks recorded increases close to 3%, the highest in two years. On the Brazilian stock exchange, the Ibovespa, its main index, reversed a drop of 1% before the announcement of the Fed’s decision to rise around 1.5%, in the final part of the trading session. At the same time, the dollar quotes retreated, with the exchange rate operating at less than R$5.

In the communication to the market, reinforced by an interview with Jerome Powell, chairman of the Fed, the American Central Bank alleviated, at least temporarily, concerns regarding hikes of 0.75 point in benchmark interest rates in the near future. Powell confirmed that the Fed is not considering hikes at that level and will look to bring interest rate policy to a soft landing.

In Brazil, with inflation projected by the market for 2022 at 8% – well above the center of the target, of 3.5%, and even at the ceiling of the tolerance interval, of 5% -, the BC now targets inflation of 2023. In current forecasts by analysts, next year’s inflation, currently forecast at 4.1%, will also be above the center of the target, set at 3.25%. In the communiqué, the BC mentions exactly the risk of de-anchoring longer-term expectations by extending the cycle of hikes in the basic interest rate.

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