Price drop reinforces bet on Selic cut in August – 07/11/2023 – Market

The rates in the futures interest market, which embody the expectations of financial agents for the course of monetary policy, operate at a sharp rise this Tuesday (11) after the release of the IPCA (National Index of Consumer Prices) for June.

The price index fell by 0.08% in June, according to the IBGE (Brazilian Institute of Geography and Statistics). It is the first time that the official inflation index has been negative in nine months, which is called deflation.

The June result was close to the median of market projections. Analysts consulted by the Bloomberg agency expected a 0.10% decline, after the 0.23% advance recorded in May.

For analysts interviewed by Sheetdespite the result being positive, service inflation, which rose 6.2% in June, continues to pressure prices, which reinforces the bet that the Central Bank will cut interest rates by 0.25 percentage points, and not at 0.50 in August.

Despite being just a little above consensus, future interest rates have a sharp rise in rates —the contract for January 2025 advanced from 10.75% the day before to 10.85% this Tuesday, while the title maturing in 2027 rose from 10.15% to 10.24%.

According to Luciano Rostagno, chief strategist at Banco Mizuho for Latin America, although the IPCA came in close to what was expected by the market, when analyzing the composition of the result, the picture is not so positive.

He indicates that core inflation measures, which seek to capture price trends, remain under pressure at around 6%, as well as service inflation, which also remains at a high level, at 6.2%.

“The opening data showed a resilient inflation of cores and services”, says Rostagno. The strategist says that, in recent weeks, the bet that the BC (Central Bank) would start the interest rate cut cycle in August with a reduction of 0.50 percentage points in the Selic rate, currently at 13.75% per annum.

For Rostagno, the IPCA in June shows a persistence above expectations and supports the most conservative wing of the Central Bank, which makes a cut of 0.25 points in August become the most likely.

João Savignon, responsible for the macroeconomic research area at Kínitro Capital, says that the fact that the country registered deflation after nine months is positive.

“But it is worth noting that the composition of today’s IPCA revealed that the face of the index or its qualitative came worse than anticipated by people. With this dynamic, BC should maintain parsimony and lean towards the cut of 0.25 point Selic in your next meeting, as per our base case.”

“The qualitative picture of inflation was worse than we had anticipated, with services showing a dynamic still far from giving additional comfort to the Central Bank. In this way, we maintain our projection of a cut of 0.25 points in August”, he says Daniel Cunha, chief strategist at BGC Liquidez.

Director of investments at manager Tag, André Leite adds that higher-than-expected service inflation is consistent with a 0.25 point cut in the Selic in August.

Leite claims that it is also necessary to take into account the external scenario, with prices still at high levels in developed economies and global central banks revising upwards the total cycle of high interest rates.

“Emerging central banks, including Brazil, engage in a cycle of falling interest rates at a time when the rise in interest rates has not yet ended abroad. Tag director.

Economist André Perfeito says that, despite not being consensual, he understands that there is room for the beginning of interest rate cuts to be stronger.

“Taking into account the style of the current management, they tend to be more incisive in their movements”, says Perfect. He recalls that the BC cut the Selic more strongly than the market expected in the most acute phase of the pandemic, also rose above market expectations, and left it stable for longer than the bets.

“I don’t see any reason why they shouldn’t cut interest rates at 0.50 points, making the base rate reach 11.75% at the end of the year.”