(Bloomberg) -- Brazil will raise interest rates less than traders expect as the Federal Reserve’s easing cycle provides a ‘Goldilocks’ scenario for risk assets, according to the head of Latin America economic research at JPMorgan & Chase Co.
Brazil’s central bank is set to start lifting interest rates on Wednesday just hours after the Fed begins to lower its rates to shore up the economy. Policymakers will hike borrowing costs 25 basis points, taking a hawkish stance to reassure investors about their commitment to bringing inflation back in line with the target, Cassiana Fernandez said in an interview in London. She expects them to lift the benchmark Selic by 100 basis points to 11.5% by January, before resuming rate cuts by mid 2025.
The Fed easing “is kind of a Goldilocks scenario for risk assets because you have much easier financial conditions without a US recession,” Fernandez said. “It will open room for most of the central banks to ease, and in the case of Brazil, to hike less than what the market is pricing right now.”
The market is pricing in an extended series of hikes in Brazil, but with the key rate reaching almost 12.25% by March.
Robust Growth
Brazil’s economy has surprised “significantly” on the upside, and is growing above its potential, proving it can take higher rates “without breaking,” Fernandez added.
The region’s largest economy shot past all growth forecasts in the second quarter, as household income got a boost from fiscal spending and low unemployment. As analysts and the government lift their estimates for growth this year closer to 3%, central bankers are raising the alarm on a resurgence of price pressures.
Moreover, investors started to question the bank’s credibility after May’s split rate vote, Fernandez said. Back then, all four of President Luiz Inacio Lula da Silva’s appointees backed a half-point cut, even as estimates of future inflation rose and public spending increased. Governor Roberto Campos Neto led a majority into a slower drop, but still the decision sparked fears the institution would be more tolerant of inflation once the leftist president took over the board.
Since then, Gabriel Galipolo has reinforced his image as an inflation crusader as he waits to be confirmed as the new bank’s next governor in a Senate public hearing next month. Initially seen by many as Lula’s advocate for lower rates, Galipolo has used a series of public speeches to drive home the message that he is willing to do “whatever it takes” to lower inflation back to goal, including lifting rates.
“The main reason why Brazil is starting a hiking cycle is a credibility issue. The cost to regain credibility at this moment seems not to be high,” Fernandez said. “The Fed will support risk assets, will help the real and will reduce a significant inflationary pressure that we have now.”
©2024 Bloomberg L.P.
