Early drop in interest rates gains strength in the market – 03/08/2023 – Market

In recent days, the bet of financial agents regarding a possible anticipation of the beginning of interest rate cuts by the Central Bank (BC) seems to have started to gain strength.

A positive expectation in relation to the new fiscal framework in gestation in the Ministry of Finance and signs of a slowdown in the economy, in the wake of a possible crisis in the credit market, are pointed out by specialists among the reasons that may help to explain the change in perception of investors on the conduct of monetary policy.

In the futures interest market, which includes investor expectations about the Selic level, currently at 13.75% per annum, rates have been on a downward path since the end of February.

The interest contract maturing in January 2024 was traded this Wednesday (8) at 13.12%, compared to the level of 13.37% at the close of February, while the title for 2027 fell from 12.74% to 12.58% in the same range.

The perception that the government, in the figure of Minister Fernando Haddad, understood that it is necessary to create the necessary conditions for interest rates to fall, be it the Selic rate or the interest curve, has contributed to the relief in future interest rates, says Silvio Campos Neto, senior economist at Tendências consultancy.

He recalls that the Treasury brought forward the announcement of the new tax framework to March, responding to the market’s wishes for a definition as soon as possible regarding the country’s new tax rules.

“There is still great uncertainty in relation to the design of the proposal, but the market is giving the government the benefit of the doubt”, says Campos Neto, adding that he realizes that expectations have grown among financial agents regarding the presentation of a proposal that is considered credible, with some kind of lock to control spending.

On Monday, Haddad said that he closed with his team the proposal for the set of rules that will replace the current spending cap. According to him, the format will now be presented to the other members of the government’s economic area and to President Lula.

According to the economist at Tendências, who is not related to the president of the Central Bank, Roberto Campos Neto, the more benign environment of recent days led the consultancy to revise this week from November to August the forecast for the beginning of the interest rate cut, with the Selic closing the year at 12.5%, compared to the previous estimate of 13%.

Chief Economist at MB Associados, Sérgio Vale adds that the signs of a slowdown in the economy, already noted by Pnad Contínua data referring to the labor market since the end of last year, and reinforced by the Americanas case and the potential negative impact on the credit market, also contribute to a drop in interest rates projected ahead.

“The scenario of a slowdown in activity consolidating itself, with signs that we may have a weaker GDP than imagined, makes room for the market to believe that we may start to have a drop in interest rates a little earlier than expected”, he says OK.

With the prospect of a slowing economy gaining strength in the market, with consequent reflections on inflationary pressure, in the Focus bulletin, the projection of economists consulted by the BC for inflation measured by the IPCA remained stable this week, at 5.90%, after of 11 consecutive increases — on December 9, before the start of upward revisions, the estimate for this year’s inflation was 5.08%.

The expectation for the Selic, which was at 11.25% at the end of October, remained stable at the level of 12.75% for the third consecutive week.

The chief economist at MB Associados also claims that the work of the Ministry of Finance has been positively evaluated by the market. The re-encumbering of fuels, says Vale, was interpreted by financial agents as a victory for the economic team.

MB Associados works with the beginning of the Selic cut in the third quarter, with the rate ending the year at 12.25%. Vale claims, however, that, if the slowdown in activity is confirmed, and the presentation of a quality fiscal framework, it is possible that the cut in interest rates will be brought forward to the middle of the second quarter.

As for Luciano Rostagno, Banco Mizuho’s chief strategist for Latin America, recent statements by the Minister of Finance that he would be discussing, together with Lula, and Roberto Campos Neto, the new names to fill the vacancies in the autarchy’s board, also may have contributed to calm market sentiments.

“The market may be seeing in this participation of Campos Neto in the selection of candidates a reduction in the risk of choosing directors with a heterodox profile, since there is great political pressure for the BC to cut interest rates”, says the specialist.

Over the past few weeks, repeated criticisms by President Lula of Campos Neto and the level of interest rates practiced in the country have sparked a warning about possible attempts by the government to interfere in the BC’s autonomy, recalls the strategist.

Rostagno adds that the apparent truce of the PT representative, which reduced the tone of criticism of the monetary authority more recently, may also have helped to calm the markets.

In any case, despite the recent decompression in interest rates, Rostagno says that the base scenario with which he works remains unchanged for the time being. He predicts that the BC should start a process of cutting interest rates only in the fourth quarter, with the Selic ending the year at 12.75%. “We continue to see a challenging scenario for inflation, with core and services inflation still resilient.”

Campos Neto, from Tendências, also says that, despite the apparent improvement in the mood of the markets, there are still a series of uncertainties on the horizon that need to be closely monitored. “The inflationary picture is not fully equated and the market will be attentive to the possibility of the government resuming the policy of subsidized credit. It is still a somewhat complex environment”, says the economist.