Rate Hike of 1.5% Is Now Brazil Base Case as Inflation Soars
Rate Hike of 1.5% Is Now Brazil Base Case as Inflation Soars
(Bloomberg) -- Brazilian traders are now betting a 1.5% interest-rate increase by the central bank on Wednesday is the base case after data showed a pickup in inflation this month was larger than expected.
Money managers raised their wagers on the key rate Tuesday as consumer prices in Latin America’s largest economy accelerated 1.2% in the first half of October from the month prior, more than all estimates in a Bloomberg survey, the national statistics institute reported. The current policy rate is 6.25%.
Just two weeks ago, swaps pricing suggested investors were expecting the Banco Central do Brasil would deliver a 100 basis-point increase that it had pointed to at its last meeting. The pressure for policy makers to raise rates faster comes amid plans for greater public spending, pressuring policy makers to act faster.
Economists at Goldman Sachs Group Inc. and Citigroup Inc. raised their estimates for Wednesday’s decision to an increase of 150 basis points.
The implied probability of the monetary authority lifting the key rate by more than 150 basis points is already higher than 30%, according to options traded at B3.
“We had been expecting a 150 basis-point increase, but it seems to be a close call now,” said Fabricio Taschetto, chief investment officer at hedge fund manager Ace Capital in Sao Paulo. “The risk is if a 200 basis-point hike becomes the base-case.”
The Brazilian real was among the worst performers in emerging markets on Tuesday, weakening 0.4% to 5.58 per dollar as of 11:21 a.m. in New York. Meantime, the Ibovespa Index fell, ranking among the worst-performing stock primary indexes tracked by Bloomberg. Higher rates may further slow the rotation to equities from fixed income and weigh on multiples due to a higher cost of capital.
“Deteriorating fiscal scenario may drive inflation and short-term rates even higher, while economic activity should be impacted,” BTG Pactual strategists led by Carlos Sequeira wrote in a report Monday.
©2021 Bloomberg L.P.