2023-08-04 00:08:12
Thus, future interest rates work as a forecast of how Brazilian rates and monetary policy will be in the coming years, providing more security
MARCELO AZEVEDO
SÃO PAULO, SP (FOLHAPRESS)
Short-term interest rates fell significantly this Thursday (3), after the Copom (Monetary Policy Committee) cut the Selic rate (basic interest rate in Brazil) for the first time in three years.
Before this week’s announcement, however, the future interest rate curves already reflected the market’s expectations about the Selic cuts and gave strength to the Brazilian Stock Exchange in the last month, supporting high projections of the Ibovespa.
WHAT ARE FUTURE INTERESTS?
Future interest represents the expectation of how Brazilian interest rates will be in the coming years and serves as a reference for raising credit throughout the country.
When taking out a long-term loan, for example, to be paid in five years, the interest rate used is that of the curve for five years from now, and not the interest rate at the time of signature, as explained by economist Beto Saadia, partner at Nomos.
“The Selic is today’s rate, at the current moment, but if it is used as a reference for a loan to be paid over the next five years, we would be considering that it will not change over time. For this reason, the expectation of how much it will be at the time of payment of the financing is used”, says Saadia.
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Thus, future interest rates work as a forecast of how rates and Brazilian monetary policy will be in the coming years, giving more security to those who carry out this type of operation.
HOW ARE FUTURE INTERESTS FORMED?
Futures interest contracts are traded on the Brazilian Stock Exchange, as a commitment to buy or sell a financial asset within a previously defined period, whether for one, five or ten years.
These operations are carried out with reference to the rate of loans maturing in one day that banks carry out among themselves, through the issuance of CDIs (Interbank Deposit Certificates). For this reason, interest on futures contracts is also called the “DI rate” in the market.
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By negotiating future interest rates, the market gets an estimate of what the interest rate will be in a given period, also taking into account the perception of the risk of not receiving the borrowed amount over time. With this, investors gain security in long-term investment operations.
For this reason, future yield curves tend to anticipate Copom (Monetary Policy Committee) decisions on the Selic rate. If market projections point to a drop in interest rates by the end of the year, for example, contracts maturing in January 2024 tend to reflect this prediction more profoundly.
“If we know that inflation is reaching the target, the future interest rate will fall long before the Central Bank meets and announces a fall in the Selic rate”, says Saadia.
Interest rate curves maturing in 2024, for example, had been registering a significant drop since June of this year, precisely anticipating a Selic cut this week. As the reduction was higher than expected by the market, the short curves fell even more after the Copom decision.
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WHY ARE FUTURE INTERESTS FALLING THIS YEAR?
Future interest rates began a downward cycle, especially from April onwards, when inflation began to show signs of slowing down. With the reduction in price hikes, investors have already started to bet on a drop in the Selic rate this year, and the future interest rate curves reflected these projections.
In May, the inflation data also came in better than expected and gave traction to the decline, but it was after the June Copom meeting that the curves reached their lowest levels of the year. At the time, the committee signaled an interest rate cut in August, causing futures contracts to drop significantly as they anticipated this week’s Selic cut.
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The approval of projects such as the tax reform and the fiscal framework also contributed to the drop in interest rates, as they reduced the risk perception of investors and the Central Bank itself regarding the conduct of the country’s fiscal policy.
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After the larger-than-expected cut this Wednesday, the shorter yield curves, from 2024 to 2026, had a new significant reduction, with investors betting on cuts of the same magnitude until the end of the year.
If confirmed, the projections could give impetus to an even greater drop in future curves, in the wake of the optimistic projections for the Brazilian economy in 2023.
HOW DO FUTURE INTEREST AFFECT THE STOCK MARKET?
The expectation of a drop in interest rates benefits Brazilian companies as they reduce financing costs, facilitating access to investment resources.
By taking out long-term loans, for example, Brazilian companies are already paying the rates embedded in future yield curves. Thus, a reduction in the curves means a lower cost of capital for the company’s operations, with less expenses for paying interest and, consequently, higher profit projections.
Furthermore, falls in interest rates make Brazilian fixed income less attractive, and investors tend to allocate their resources to other applications, including variable income. For this reason, interest rate cut cycles tend to benefit the Stock Exchange.
In mid-May, for example, XP increased its projection for the Ibovespa in December from 128,000 to 130,000 points, citing precisely the drop in future interest rates.
HOW DO FUTURE INTEREST AFFECT EXCHANGE?
The real tends to benefit from higher interest rates, as higher rates increase Brazilian fixed income returns and attract foreign funds to the country. With that, projections of falls in interest play against the Brazilian currency.
Right after the Copom meeting, for example, the dollar soared by almost 2% and returned to the level of R$ 4.89 precisely because of the expectation of a reduction in the interest rate differential between Brazil and other economies, which makes investors reallocate their resources for more profitable markets.
High interest rates are not, however, the only pillar of appreciation of the real, and economists point out that Brazil may continue to attract foreign funds due to the attractiveness of variable income, which should benefit from the drop in interest rates.
In addition, even with the 0.50 point cut, Brazil still has one of the highest real interest rates (which discount inflation) in the world, which keeps the country attractive.
HOW DO FUTURE INTEREST AFFECT YOUR POCKET?
The reduction in future interest rates also reduces the cost of all credit and loan operations in the country, including vehicle financing and home appliance installments.
Saadia, from Nomos, points out that future interest due in January 2024 includes expectations for just four months from now, and even affects purchases in four installments, for example.
In addition, the economist points out that high interest rates also increase inequality, as they increase the income of investors who live on income.
“In countries with high interest rates, richer people manage to have a stable income just by returning assets, without actually contributing to the economy. Having a country with low interest rates is essential to reduce social inequality”, says the economist.
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