Early interest rate cuts observed by Brazil Central Bank emerging rapidly.
2023-08-02
■The financial market decided to implement the first interest rate cut since August 2020 by Brazil’s central bank on August 2.
■ The slowdown in price growth may suggest an easing of opposition between the Lula regime and Brazil’s central bank, promoting interest rate reduction observation.
Brazil’s central bank (BCB) is scheduled to release the results of the Financial Policy Committee (COPOM) on August 2nd, but the reduction of policy interest rates from 13.75% to 13.50% is highly probable. In a part of the market, the 50bps interest rate reduction observation is also heinous. If we decide to cut interest rates, it will be the first time since August 2020. BCB began raising interest rates in March 2021 (from 2.00% to 2.75%) and did not continue to raise rates until August 2022.
The last time the monetary tightening stance of BCB was confirmed during COPOM in June, there were no hints of early interest rate cuts in the statement. We believe that there are three activities where the tide has changed: (1) the June COPOM meeting summary released on June 27th; (2) the Decision of the National Currency Convocation (CMN) held on June 30; (3) Consumer price index (IPCA) for June released on July 11.
In (1), more than half of the members hinted that "if the inflation situation becomes calmer, COPOM may lower interest rates in August next time." Although there are conditions based on price trends, BCB is interpreted as actively lowering interest rates, rather than expectations after COPOM in June. (2) After setting the target of a 3% price increase rate in BCB in 2026, the timeline for achieving the target has been extended from the previous year to two years. Although these measures meet market expectations, it can be said that the President Neto of the BCB has expressed great support for the timeline revision. The CMN is composed of the Minister of Finance, Minister of Planning and Budget Management, and President of BCB, and the government's intentions are easily approved. The president of BCB, Neto stated that his goal is to achieve a smooth timeline revision of the monetary policy cycle, implying that the conflict between the Lula government and BCB has eased, increasing the possibility of BCB early interest rate cuts. (3) The year-on-year growth rate of growth rate was 3.16%, further slowing down from the May IPCA (3.94% year-on-year) and also lower than the median target of Bank of Brazil 3.25% year-on-year). The measures taken by BCB to curb inflation are interpreted as effective, increasing the likelihood of interest rate cuts.
On July 31, the Board of Directors of the International Monetary Fund (IMF) assessed Brazil's current financial policy position as "appropriate" and requested that policy operations continue based on data compiled into future risks. He also pointed out that he welcomed Brazil's tax reform plan, which seemed to be beneficial for the conflict between the Lula government and the BCB. If a decision is made to implement a rate cut, a positive explanation for Brazilian assets will be widely circulated.
■ The slowdown in price growth may suggest an easing of opposition between the Lula regime and Brazil’s central bank, promoting interest rate reduction observation.
Brazil’s central bank (BCB) is scheduled to release the results of the Financial Policy Committee (COPOM) on August 2nd, but the reduction of policy interest rates from 13.75% to 13.50% is highly probable. In a part of the market, the 50bps interest rate reduction observation is also heinous. If we decide to cut interest rates, it will be the first time since August 2020. BCB began raising interest rates in March 2021 (from 2.00% to 2.75%) and did not continue to raise rates until August 2022.
The last time the monetary tightening stance of BCB was confirmed during COPOM in June, there were no hints of early interest rate cuts in the statement. We believe that there are three activities where the tide has changed: (1) the June COPOM meeting summary released on June 27th; (2) the Decision of the National Currency Convocation (CMN) held on June 30; (3) Consumer price index (IPCA) for June released on July 11.
In (1), more than half of the members hinted that "if the inflation situation becomes calmer, COPOM may lower interest rates in August next time." Although there are conditions based on price trends, BCB is interpreted as actively lowering interest rates, rather than expectations after COPOM in June. (2) After setting the target of a 3% price increase rate in BCB in 2026, the timeline for achieving the target has been extended from the previous year to two years. Although these measures meet market expectations, it can be said that the President Neto of the BCB has expressed great support for the timeline revision. The CMN is composed of the Minister of Finance, Minister of Planning and Budget Management, and President of BCB, and the government's intentions are easily approved. The president of BCB, Neto stated that his goal is to achieve a smooth timeline revision of the monetary policy cycle, implying that the conflict between the Lula government and BCB has eased, increasing the possibility of BCB early interest rate cuts. (3) The year-on-year growth rate of growth rate was 3.16%, further slowing down from the May IPCA (3.94% year-on-year) and also lower than the median target of Bank of Brazil 3.25% year-on-year). The measures taken by BCB to curb inflation are interpreted as effective, increasing the likelihood of interest rate cuts.
On July 31, the Board of Directors of the International Monetary Fund (IMF) assessed Brazil's current financial policy position as "appropriate" and requested that policy operations continue based on data compiled into future risks. He also pointed out that he welcomed Brazil's tax reform plan, which seemed to be beneficial for the conflict between the Lula government and the BCB. If a decision is made to implement a rate cut, a positive explanation for Brazilian assets will be widely circulated.