By Marcela Ayres
BRASILIA (Reuters) – Brazilian markets responded coldly on Thursday to the central bank’s decision to maintain a hawkish stance and keep interest rates unchanged in the face of rising inflation expectations.
Holding the benchmark Selic rate at a six-year high of 13.75% on Wednesday for the fifth consecutive time, policymakers dashed hopes of a more lenient signal for monetary easing amid global banking turmoil.
Future interest rates opened the session higher, and expectations embedded in the yield curve that initially continued to show rate cuts kicking off in June started to point central bank acting only in August.
The U.S. dollar rose 0.75% against the Brazilian real after beginning the trading session with a decline. The benchmark Bovespa index dropped 0.6%, falling below 100,000 points for the first time since July 2022.
Sergio Goldenstein, chief strategist at Warren Rena, said the central bank had dampened chances of a near-term cut. He noted that policymakers did not mention a potential credible fiscal framework as a downward risk for inflation, and indicated they could resume hikes if necessary.
“Furthermore, the various criticisms of government officials against the central bank generate uneasiness,” he added.
Sandro Sobral, trading director at Santander, however, noted that subdued reaction at the beginning of the session shows that the market is not heavily positioned one way or the other. Investors could be expecting policymakers to capitulate to growing signs of a major economic slowdown ahead.
“It’s curious to see how the traders and the economists reacted to the decision. The traders are disappointed. The economists pretty much happy. There’s a big divergence between the market and academic views now,” he wrote.
The bank monetary policymakers emphasized that they would continue to assess whether maintaining this level for a long period would be enough to lead consumer prices closer to the official target.
The message was interpreted as harsh, given expectations about a sooner start to rate cuts after a more challenging global environment on the back of U.S. bank closures and the collapse of Credit Suisse.
Brazilian President Luiz Inacio Lula da Silva said the central bank must pay the price for the high level of interest rates, telling reporters that Brazil needs to create jobs.
Finance Minister Fernando Haddad described the central bank’s statement as “very worrying,” stating that maintaining the Selic rate could negatively impact public accounts by creating difficulties for company sales and for collecting taxes.
Lula’s chief of staff, Rui Costa, called the central bank “insensitive”, while the president of his Workers Party (PT), Gleisi Hoffmann, said the central bank was “only benefiting rentiers and those who do not produce.”
(Reporting by Marcela Ayres; Editing by Marguerita Choy)
