Future interest rates fall after Selic maintenance at 13.75% – 05/04/2023 – Market

Future interest rates, especially long-term interest rates, fell this Thursday (4), after the decision by the Copom (Monetary Policy Committee) to maintain the Selic (basic interest rate) at 13.75% per year .

Contracts maturing in January 2024 fell from 13.24% to 13.21%. Those for January 2025 went from 11.88% to 11.79%, while those for 2026 went from 11.58% to 11.45%.

The decrease shows the market projecting a more favorable economic environment for Selic cuts, which should happen from the second half. New interest rate hikes should also not be necessary for the Central Bank (BC) to control inflation.

The most recent IPCA-15 (Extended Consumer Price Index 15), for example, showed that price increases in Brazil are slowing down. In April, the indicator rose by 0.57%, the lowest rate since 2020.

Although the Copom maintained its conservative tone in its communiqué on interest rates, in which it did not show signs of a decrease in the Selic rate, analysts believe that a new increase this year is unlikely.

“The Copom hinted that the possibility of further raising interest rates is small. The BC should keep the Selic at 13.75% for a longer time to control inflation, and the market is already starting to project a slight drop later this year In the long term, interest rates should not remain at this level”, says Piter Carvalho, chief economist at Valor Investimentos.

The Bank of America adjusted the projection for the Selic rate at the end of this year from 11% to 11.75%, but now bets that the first cut will be made in August.

Bradesco maintained its forecast of 12.25% for the basic interest rate at the end of 2023. For the bank, the worsening of expectations and the uncertainty about the Brazilian economic scenario do not allow the Copom to give clear signs of a decrease in interest rates, but the beginning of a cycle of cuts is still expected for this year.

The chief strategist at Warren Rena, Sergio Goldestein, says that, in addition to the committee’s signals, the external scenario favored the fall in long-term interest rates.

“Some analysts saw signs of greater flexibility in the tone adopted by the Copom. This, added to the problems in the banking sector, the risks of a recession in the US and the prospect of a pause by the Fed [Federal Reserve, o banco central americano] contribute to the fall of future interest”, says Goldestein.

For the economist, even if the tone used by the committee was harsh, it is possible to maintain the Selic’s downward assessment until the end of the year.

“Regardless of the interpretation of the Copom signal, the assessment is that the tough speech seeks to control inflation expectations, but that, at some point this year, reality will impose itself and the BC will have to start easing [dos juros]albeit in a very gradual way”, he says.

In its communiqué, the Copom states that it continues to consider uncertainties about the economic scenario and whether the strategy of maintaining the basic interest rate for a prolonged period will be able to contain inflation. He also said that there is no mechanical relationship between the decrease in inflation and the approval of the fiscal framework.

On the other hand, the Central Bank mentions the additional fall in commodity prices, the possibility of a more pronounced slowdown in global economic activity, driven by adverse conditions in the global financial system, and a reduction in the granting of domestic credit greater than would be compatible with the current stage of the monetary policy cycle.

In the United States, the Fed raised the country’s rates by 0.25 percentage points, and the president of the institution, Jerome Powell, also adopted a strict tone on interest rate policy. There were, however, signs of a possible pause in rate hikes, giving authorities time to assess the recent bank failures.

After the bankruptcy of First Republic Bank, the third financial institution to collapse in the US since March, US regional banks have recorded significant falls and increased fears about the country’s financial system.

PacWest announced that it has been approached by potential partners and investors about a potential sale and has dropped 50.55% on Thursday. Western Alliance, another major US regional bank, was down 38.73% on the day.

The banking crisis and the fear of a recession in the country may be evaluated by the Fed as reasons to pause the escalation of interest rates in the US, which is already feeling the effects of the economic slowdown.