Market already expects Selic close to 9% per year in 2024 – 05/06/2023 – From Grain to Grain

No one has any doubt that at the next meeting of the Monetary Policy Committee, on June 21st, the decision should once again be to maintain the Selic rate at the level of 13.75% per annum. However, according to market prices, this should be the last maintenance decision for the next 18 months.

Despite the rigidity of the president of the Central Bank (BC) in saying that he will keep the basic interest rate high for as long as necessary for inflation to converge to the target, the financial market is already looking well ahead.

Who decides the short-term interest rate, that is, 1 day is the BC. For the following deadlines, the market defines through daily trading on B3.

These rates are negotiated in 1-day DI contracts. In these contracts, market agents negotiate what the accumulated CDI will be from today until the expiration date of the contract.

For example, the DI1F24 contract represents the DI rate for today until January 1, 2024. This rate closed today at 13.16%.

I will explain intuitively. This rate above represents the average of what is expected for the CDI from today until the end of the year. Think about how to calculate an average. We have a higher point which is the current rate of 13.65% pa of the CDI.

We want to find the bottom point, so the average is 13.16%.

In a rough calculation, just multiply 13.16% by 2 and subtract 13.65%, resulting in 12.67%.

Of course, this account is not accurate in this way, but the objective is to explain to a layman what he should expect and how he can follow along in a simple way.

Remember, today the CDI is at 13.65% per annum. Therefore, the financial market already expects a drop of more than 1% over the second half of 2023.

I’ll leave it to you to do the above simplified math for next year. For that, I’ll tell you how much is the DI1F25, which expires on January 1, 2025. This DI contract is traded at a rate of 11.32% per annum. Try doing the same simplified math above.

According to the rates negotiated in the 1-day DI contracts, the cycle of falling interest rates extends throughout the next year. So it is already expected that the Selic will approach 9% per annum in the second half of 2024.

The expected level of 9% per annum represents a drop of 4.75% in the basic interest rate in less than 18 months.

In addition to bringing opportunities, this movement in interest brings a warning to those who only have investments referenced to the CDI and savings. These will see profitability drop significantly.

Is your portfolio ready for this drop in interest rates?

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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