What the world says to the Central Bank and its interest rates – 05/02/2023 – Vinicius Torres Freire

This Wednesday (3) is decision day on basic interest rates in the United States and Brazil. It will be another day of political skirmishes over the Selic. It’s also a convenient day to review what’s going on in the world economy, which we pay little attention to, despite the fact that so much of that life out there influences us so much here. It also influences the decision of the Brazilian Central Bank.

The bad Tuesday (2) in the financial markets suggests some reasons for attention. Yes, the reader may not like them and their bumps, but that is equivalent to not liking the weather forecast and going out naked on a snow forecast day, in the extreme case.

There is a financial crisis that, for some, is still on the back burner and cooling down, but may just be simmering. The owners of money distrust average American banks. Some of the more targeted ones even lost 10% to 28% of their market value on this Tuesday of tumbles on stock exchanges around the world and here.

The conversation persists that the distrust of customers, their creditors, perhaps regulatory tightening and weak balance sheets affect banks in a relevant way and will have (or already have) secondary effects on the real economy, on credit.

Economists at a bank like JP Morgan say little attention has been paid to the risk of a crisis in the non-bank financial sector. Nearly 15 years of very low global interest rates may have created such a dependency that kicking the habit can be traumatizing.

By the way, JP Morgan just bought the remnants of one of those mid-sized banks that failed, or nearly so, but the tension, if not the crisis, continues.

Signs of cooling in the US economy are becoming more frequent. The labor market is showing signs that it can return to normal (it is way above that).

In the world, the price of commodities, such as oil, drops. Not even the cut in production by the cartel, by OPEC, did any good. After a peak of US$ 87 in April, the price of a barrel of the Brent type dropped again to around US$ 75. Diesel consumption, a thermometer of world activity and trade, is down. The price has dropped even around here.

A cooler world economy, in theory, could result in lower interest rates or a contained increase, which facilitates the work of the Central Bank of Brazil.

One result of the cooling down, or speculation about it, is the drop or containment of commodity prices (oil, iron, meat, etc.). If the dollar also stays at least around R$ 5, it is yet another contribution to contain prices in Brazil.

However, despite minimal and slow improvements, inflation remains high. Inflation expectations for 2024 are not low. Service inflation remains bad and should not decrease until average salary increases are curbed. The granting of bank credit has fallen since the end of last year. It could be a warning of a cooling off from the second half of the year, but we have been in the dark about Brazilian economic indicators.

Lower pressures on inflation have a theoretically bad downside. A weaker economy in the world can cause casualties here. They can be direct effects, as in minor trade, contagion, etc. Downcoming commodities lower tax collections, all else being equal. For the Lula-Haddad ceiling to work, it is necessary to collect more taxes. The destination of the collection will temper the reactions of the financial square and larger economic agents regarding the said fiscal framework.

Finally, major financial crises or tensions are slow to digest and uncertain. An explosion affects us. Even the “little wave” of 2008 caused a mini-recession here in 2009 — when the country was close to the economic peak of the last 40 years.

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