Still tough statement from BC suggests high adjustment in future interest rates this Thursday By Reuters

2023-06-22 01:46:13

© Reuters. Central Bank headquarters, in Brasília 02/14/2023 REUTERS/Adriano Machado

By Fabrizio de Castro

SÃO PAULO (Reuters) – The still tough statement from the Central Bank’s Monetary Policy Committee (Copom) indicates that the rates on interest rate futures contracts should go through upward adjustments at the beginning of this Thursday’s session, especially in the short stretches of the term curve, evaluated market professionals.

In the document in which it justified maintaining the base rate at 13.75% per year for the seventh consecutive meeting, the collegiate still adopted a tough tone — or hawkish, in market language — in relation to controlling inflation. The institution argued that it is necessary to have “patience” and linked an eventual Selic cut to economic data.

In general terms, the communiqué was less harsh than that of the previous meeting, in May, when the BC was still citing the possibility of new Selic hikes, but it was harsher than what was priced by the market in recent weeks, as it did not make it clear that the cutting process will actually start in August.

“Tomorrow (Thursday) we tend to see the market a little less optimistic, with interest rates rising, with probably the stock market falling and a repricing of assets based on this maintenance of monetary policy in the way it was signaled today, something that was not expected by the financial market at that time,” said Carla Argenta, chief economist at CM Capital, in a note.

A professional with extensive experience in the fixed income market heard by Reuters, who preferred not to be named, also predicted upward adjustments to the forward curve on Thursday.

According to him, “remains alive” the possibility of cutting 25 basis points at the August meeting, but the statement reinforces that, if the cycle actually starts at the next meeting, the first action will hardly be 50 basis points, as already had been speculated by some agents.

However, the statement also increased doubts about whether the first cut will come in August, or if it will be left for September.

“The Central Bank seems to be looking more towards the September meeting, while the market seems to be more convinced with the next August meeting”, pointed out in a note Daniel Cunha, chief strategist at BGC Liquidez.

As the forward curve was already well priced for an August cut, rates tend to rise at the start of business this Thursday. The expectation is that the curve will shift slightly with the rise in rates in the short end, although the impact of the announcement will be reduced in the long end.

“With regard to the impacts of the announcement on the yield curve, we expect a slight upward pressure on the short-term segment and non-relevant variations in the long and intermediate part”, pointed out the chief strategist at Warren Rena, Sérgio Goldenstein, in a note to customers.

For Débora Nogueira, chief economist at Tenax Capital, even though the BC statement came harder than expected, “the general tone was in the sense of making room for flexibility in the next meetings”, he evaluated, in a note to clients.

In the case of the exchange rate, the effects of the announcement may be diluted, as other factors have weighed on the most recent retreat against the real, such as the favorable external scenario. Even so, the prospect of a longer Selic rate in Brazil brings, in theory, an upward bias for the dollar and a downward bias for the .