Future interest rates fall with perspective of Selic cut – 06/21/2023 – Market

Long-term futures interest rates have been falling and operating at their lowest levels of the year this month, after the consolidation of expectations that the Central Bank should start a cycle of interest reductions in the second half of this year.

This Wednesday (21), the Copom (Monetary Policy Committee) decided to maintain the Selic (basic interest rate) at 13.75% per year, but did not signal that possible cuts are on the way. The market’s bet, however, is that interest rates begin to be reduced as early as August, at the next committee meeting.

After the Selic announcement, future long-term interest rates fell, and contracts maturing in January 2027 dropped from 10.53% to 10.50%. The curves for 2024, 2025 and 2026 had a slight rise, but still register a significant drop since the beginning of the year.

The rates for January 2024, for example, were at 13.52% on January 1, 2023. This Wednesday, they reached 13.03%, a drop of almost 0.5 percentage points.

In the longer curves, the drop was even greater: interest rates for 2025 went from 12.91% to 11.11% in the same period, while those for 2026 went from 12.87% to 10.53%. Those for 2027, which are at 10.50%, started the year at the level of 12.91%.

Luiz Carlos Corrêa, a partner at Nexgen Capital, says that the prospect of falling interest rates has started to become clearer with the latest inflation data, especially since April, when price increases slowed down to 0.61%, compared to 0.71% in March.

It was the May data, however, that consolidated the downward projections, when the IPCA recorded its lowest change for the month since 2020, slowing down to 0.23%. The indicator surprised the market, which expected an increase of 0.33%.

“The indicators showed that Brazil managed to combat the rise in prices, which was strong at the beginning of the year. This brought an interesting moment for the BC to start signaling an interest rate cut, which directly reflects on future rates, which are already beginning to predict this movement”, says Corrêa.

Economist Fernando Siqueira, head of research at Guide Investimentos, cites the approval of the fiscal framework in the Chamber of Deputies as one of the factors that helped to reduce future interest rates. The new rules were classified by the BC as something that would provide more clarity in the economic environment, as it would reduce the country’s risk perception.

“The market understood that the scenario for the Central Bank to reduce interest rates was clearer and consolidated expectations of interest rate reductions, which has a direct impact on future curves”, says Siqueira.

Expectations were further reinforced by the above-expected GDP in the first quarter, released in early June, which triggered a series of positive revisions for the growth of the Brazilian economy. As an additional boost, Corrêa mentions the elevation of the long-term outlook for Brazil by the S&P, which brought down the dollar and gave breath to the Brazilian Stock Exchange in the last trading sessions.

Despite the Copom not having signaled a drop after this Wednesday’s meeting, the market consensus is that there is already room for a Selic reduction in August, which could further reduce future interest rates.

XP’s chief economist, Caio Megale, claims that the committee opened the door to a possible cut at its next meeting by mentioning an improvement in the inflation outlook. Therefore, XP maintained its projection that a cut of 0.25 percentage points will be the BC’s next step and sees the rate at 11% in the first quarter of 2024.

Analysts consulted by the Central Bank follow the same perspective of cuts in August. This week’s Focus bulletin showed that the market expects a cut of 0.25 percentage points at the August meeting and projects the Selic rate at 12.50% at the end of the year.

Siqueira, from Guide, says that the house projects that interest rates may fall to the range of 9% next year.

If confirmed, the projections could give impetus to an even greater drop in future curves, in the wake of the optimistic projections for the Brazilian economy in 2023.