Effect of US interest rate hikes on Brazil limited, experts say

Brazil should be harmed by the new cycle of high fees us U.S but with limited effects, according to experts consulted by the CNN Brasil Business . The cycle started in March of this year, and gained a new chapter on Wednesday (4).

THE Federal Reserve the central bank of the world’s largest economy, announced a 0.5 percentage point increase in interest rate , which is now in the range between 0.75% and 1% per year. It was the biggest rise in more than 22 years, and it came as the country faces the highest level of inflation in more than four decades.

Due to the size of the country’s economy, any change in US monetary policy affects economies around the world, and Brazil is no exception. When interest rates rise, the tendency is for investments to exit emerging countries, with investors seeking the safety and profitability of the United States.

However, experts point out that Brazil may not be as affected by the movement as other markets, and that it is still in an attractive position, despite the scenario being uncertain due to the elections in this year.

The Fed’s Next Steps

On the same day that the Fed raised interest rates, the mayor, Jerome Powell stated that the central bank already sees at least two new increases of 0.5 pp as likely in the next meetings.

On the other hand, he said that Fed officials are currently ruling out a rise of 0.75 pp, expected by the market due to the degree of spread. inflationary and also removed risks of a recession in the country, seen as likely by some segments.

For Alexandre Espírito Santo, chief economist at Órama, the current moves reflect an error in the Fed’s stance, which considered that the inflation that emerged during the pandemic would be transitory, and therefore would not demand high interest rates.

“It was not just a matter of inflation due to the disruption in production due to the pandemic. The Fed, BCs and governments in the pandemic started to issue money, the monetary base grew by more than 30%, and that generates an expansion of demand, inflation”, he says.

The municipality’s view that inflation would only be supply, however, made the Fed fall behind in the fight against it, and now it became necessary to accelerate monetary tightening.

In the current scenario, Espírito Santo sees the central bank “hostage” to the market, which has been raising the country’s future interest curves, forcing rate hikes.

The Fed was supposed to go up 0.75 pp for the carriage floor, but said it won’t. This causes a feeling in the market that the Fed does not effectively know what the next step is, because some leaders believe in this greater increase.

Alexandre Espírito Santo, chief economist at Órama

The economist expects that the next meeting will have a rise of 0.5 pp and that, with more data on inflation, the leaders will signal a new increase of this magnitude or leave open the possibility of greater increases, contradicting what was said by Powell. on day 4, or even smaller, of 0.25 pp

“The market needed a gradual increase, to give it time to react, but there is no way because the Fed can no longer go slowly, it took a while to realize the problem it was dealing with”, he says.

“If the Fed accelerates to 0.75 pp, the market could panic over the reversal of speech, and that would be very bad. It should give another 0.5 pp rise, give the market time to reflect”.

On the other hand, Espírito Santo considers that the details of the process of reducing the autarchy’s balance sheet, currently at US$ 9 trillion, came within what was expected by the market, but it is important to see how investors will react to the reduction of liquidity, that is, from money circulating in the economy as the Fed stops buying bonds.

“If the market starts to put central banks against the wall, it is very bad, it will cause a panic, strong drops in the stock markets, and that is not good. In theory, US stock markets are way beyond what they should be, they are relatively expensive, if interest rates rise, it takes away their attractiveness, and if they collapse, it generates a global crisis”.

André Perfeito, chief economist at Necton, also sees a 0.5 pp rise as more likely at the next meeting. “If a 0.5 pp rise already caused this reaction in the markets, a 0.75 pp increase could be even more problematic”, he assesses.

He considers that interest rates in the country will already have a relevant high at the end of the current cycle, reaching up to 6%, and the Fed’s effort now is to try to keep markets calm, despite the nervousness about the possible effects of this process.

For the economist, the problem is that the market “has taken a position mounted on inflation”, that is, it believes that the inflationary process is worse than the Fed assesses, and that therefore it will be wrong in the size of interest rate hikes.

The situation ends up generating “a lot of pressure” on the autarchy, and Perfect says that it will be necessary to be firm on the part of its leaders, avoiding changes of opinion that further weaken the position of the central bank and reinforce fears in the market, throwing the stock markets to down and the dollar up.

Effects in Brazil

The Necton economist says that care must be taken in predicting that interest rate hikes will worsen the performance of the stock Exchange in Brazil because they, in general, were already expected.

“United States stocks may fall further, but I see exaggeration in Brazil because the stock market is already at a very low level,” he says, citing the poor performance in 2021.

The trend, according to him, is for 2022 to have a “stretched dollar and a stock market suffering more, but more because of a market panic, which is buying this idea of ​​worsening inflation”.

The picture of global pessimism, supported by factors other than US interest rates, such as lockdowns in china and the war in ukraine have already made the Ibovespa return almost all gains in reais in 2022, while the real continues to appreciate, but again around R$5.

Perfect states that the conditions that generated the great attractiveness of the Brazilian market in the first quarter – a record high in commodity prices and very high interest rates in the world comparison – should not be repeated with the same intensity in the rest of the year, generating less attractiveness.

“But Brazil has some characteristics that conspire for a stronger stock market. The Central Bank is ahead of the rest of the world, has already made adjustments and can cut interest rates before others. There is space, Brazil can improve”, he evaluates.

The main obstacle to this improvement, however, is the presidential elections. Perfect expects a high level of stress, with the risk of institutional instability and a lot of noise, which can stress the real against the dollar.

Even so, “given that the stock market is discounted, the interest rate differential, and that we produce commodities, the dollar should not reach R$ 6. We have favorable elements, and other emerging markets are just as bad. Brazil doesn’t look so bad in relative terms, but it could get worse.”

Another positive factor in this regard is the high interest rates themselves, which, as much as they slow down the economy, help to attract foreign investment.

Alexandre Espírito Santo points out that the Brazilian stock exchange returned the gains of 2022 in reais, but, considering the variation in dollars, it remains high. The possible effects of what will happen in the United States for Brazil depend, in his view, on three scenarios.

The first, more positive, would involve the Fed being able to regain the reins of the fight against inflation and contain it without excessive interest rate hikes. The second would bring stagflation in the United States, combining high inflation and low growth. The third, and worse, would involve the need for a brake that was “too sharp” to combat inflation, leading to a recession .

“These scenarios indicate what will happen to the global economy in 2022 and 2023. The current impression is that the next 60 days will be crucial to have a better idea, and we cannot forget about the war and the pandemic, the effects that may still have “, it says.

The economist at Órama is betting on a scenario of low growth and a slow drop in inflation, but without ruling out a possible stagflation. Any slowdown in the US economy, however, affects the entire world, especially large exporters such as Brazil, whose combination of domestic and foreign scenarios weighs on low growth projections in 2022.

He assesses that the elections should be the country’s “big problem” this year, and that a combination of the external scenario with electoral stresses can make the dollar rise further. Currently, however, Órama projects that the US currency will end 2022 between R$5 and R$5.10.

If the election does not bring major negative surprises, Espírito Santo says it is possible that Brazil will regain part of the attractiveness of the beginning of the year, helped by bigger problems in other emerging countries, such as China and Russia.

“If we don’t have a recession in the United States and the election doesn’t bring unpleasant surprises, then the country will be attractive again. The stock market is still very cheap, it has very solid companies, with good results, it can go up again”, he says.

Even if the dollar suffers new highs, he assesses that the impact on inflation tends to be smaller than in 2021, unless the increase occurs very quickly, which he considers unlikely today.

“We still haven’t seen the effects of the dollar’s fall on inflation, and now that activity starts to want to recover, there should not be a price increase just because of the dollar’s rise, businessmen will hold on to the transfer. In the short term, this should not affect inflation,” he says.