Brazil Central Bank Sends Hawkish Message, Warns of Final Rate Hike

Bloomberg — Brazil’s swap rates rose after the central bank sent a hawkish message to investors, reminding them that a final interest rate increase remains on the table even as most traders bet that its aggressive monetary tightening campaign ended last month.

“We need to send out a hard message,” Roberto Campos Neto, the bank’s president, said at an event organized by local newspaper Valor Economico late on Monday. “The message that’s still valid is that we’ll evaluate the need for a final rate hike” in September.

Rates on the belly of the curve rose about 10 basis points on Tuesday, while those at the short end of the curve were up about 5 points. The real weakened against the dollar at open, following losses in its main emerging-market currency peers.

He added that the central bank isn’t thinking about rate cuts yet. “We’re still thinking about finishing our work” of bringing inflation back to target.

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Brazil’s Economy Shows Resilience, Grows More Than Forecast Before Relief Measures

Brazil’s economy has shown signs of dynamism, with the labor market performing better than expected, even after the central bank increased its key interest rates by 11.75 percentage points since March 2021, to 13.75%

Most traders had largely dismissed chances of additional monetary tightening after a campaign that has already added 11.75 percentage points to borrowing costs since March 2021. With the Selic currently at 13.75%, economists are discussing when rate cuts may start, as the central bank forecasts three consecutive months of deflation resulting from large fuel tax cuts.

Still Concerned

Yet policy makers remain “vigilant” and “concerned” about key inflation components such as services and salaries, Campos Neto said. Stronger-than-forecast growth in the second quarter is keeping domestic demand strong.

After Campos Neto’s strong message on inflation, investors will now focus on remarks from Monetary Policy Director Bruno Serra at an event organized by Bradesco Asset Management on Tuesday morning.

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Brazil’s Sky-High Interest Rates Fuel World’s Best Carry Trade

The carry trade -- what investors make by borrowing in dollars and buying local notes -- has produced a 24% return since the end of December

Economists surveyed by the central bank revised up their inflation estimates for 2024 this week, although they lowered forecasts for this year and next. Most still see consumer prices rising above target through 2024.

Read more at Bloomberg.com