Copom tends to generate an upward adjustment in future short and medium interest rates, say analysts – 05/03/2023 – Market

The rates of interest futures contracts tend to go through upward adjustments on Thursday (4), especially between maturities with short and medium terms, after the decision of the Monetary Policy Committee (Copom) of the Central Bank, evaluated professionals heard by Reuters.

This Wednesday night, the collegiate maintained the basic Selic rate at 13.75% per annum and released a statement that raised doubts among financial market economists. While some assessed that the tone of the document was softer (or dovish, in the language of the market), others saw an even tougher (or hawkish) speech.

Among the different assessments, however, the perception was that the communiqué left little or no room for the beginning of the interest rate cut cycle to take place at the next Copom meeting, scheduled for June.

“I had a previous reading that there was a chance of the rate starting to fall in June. After this announcement with harsher language, the chance of June decreased a lot. It is practically zero”, summarized the chief economist at Órama, Alexandre Espirito Santo.

In the statement, the Copom once again pointed out that it could resume the Selic hike cycle if the disinflation process does not occur as expected. However, the collegiate added a sentence emphasizing that this is the “least likely scenario”.

By qualifying the possibility of new interest rate hikes as “less likely”, the Copom somewhat softened its discourse, in the view of some economists.

“The Copom lightened the tone of the statement a little, coming a little more dovish than we expected, for two reasons: having kept inflation expectations unchanged, with a downward revision in the alternative scenario; and having qualified the scenario of a possible resumption of the cycle as less likely”, wrote João Savignon, head of macroeconomic research at Kínitro Capital.

Espirito Santo, however, defended that if the intention had actually been to write a more dovish communiqué, the BC would have removed the entire section about the possibility of raising the Selic rate.

That’s what the Federal Reserve did, for example, in its communiqué this Wednesday afternoon, by excluding a section that mentioned “additional tightening” of monetary policy.

For Órama’s chief economist, as futures contract rates for 2025 and 2026 dropped this Wednesday under the influence of the outside world — respectively, 9 and 13 basis points — there is room for upward adjustments on Thursday, in reaction to Copom.

“It may return some of the fall. But I don’t see anything significant, because an important part of the market was already waiting for the tough speech that came in the statement”, he pointed out.

For the chief strategist at Warren Rena, Sérgio Goldenstein, the announcement was “very tough” and did not give any sign of monetary relaxation in the short term.

Goldenstein recalls that the Copom maintained in the document the fiscal issue as an upward risk for inflation, while not including the recent strong drop in the dollar as a downward risk.

The professional also pointed out that the collegiate, in the document, did not mention the elimination of the tail risk with the presentation of the project of the new fiscal framework to Congress.

“The statement pointed out that controlling inflation ‘requires patience and serenity’. This is a clear message that the Central Bank is not willing to make monetary policy more flexible in the short term,” said Goldenstein. “At no point does he show signs that he could, if certain conditions are met, start the cycle of relaxation in the next meetings.”

Due to this hawkish tone, Goldenstein says that the short and middle part of the forward curve may see some upward pressure in this Thursday’s session. The expectation is that there will be a flattening movement (flattening), with high in the short part at the opening of the market.

In the case of the exchange rate, the Copom’s decision and announcement would be, at the margin, a factor for the appreciation of the real (fall of the dollar). “But I don’t think it will significantly affect the exchange rate. The currency should follow the external scenario more”, he evaluated.