Tougher ECB could help Brazil’s inflation drop, analysts say

The decision of the European Central Bank (ECB ) to raise interest rates by 0.75 percentage point represented a tougher position by the municipality in the fight against inflation, which could also reverberate in the inflation Brazilian, according to analysts.

The ECB held this Thursday (8) the biggest interest rate hike since 1999 to an unprecedented magnitude since the euro became the common currency of 19 European countries. In addition, it signaled that the bullish cycle will continue in the next meetings.

The tendency, therefore, is to weaken the economy of euro zone already shaken in the midst of a crisis in the supply of natural gas .

The situation, say experts, tends to have a negative impact on commodity prices, whose international price affects both the Europe as Brazil, and can influence the plans of the central bank albeit at a lower intensity.

A more aggressive ECB

The change in the ECB’s stance was due not only to the rise in interest rates by a high magnitude, but also to the discourse and justification of this decision, assesses Marilia Fontes, founding partner of Nord Research.

“The ECB has already said that the next increase is not defined and depends on the data, and it could be another one of this magnitude, something that the market did not consider before”, he evaluates.

Fontes points out that, for many months, the ECB relied on the fact that inflation in Europe to be more linked to supply problems, especially natural gas, than in other countries, such as the United States .

Now, the ECB has indicated that, even if the problem is one of supply, the posture will be different, and inflation “is something that has to be fought. Before, they were based on the fact that it was on offer and that there was no need to act”.

In this sense, the decision of the municipality was important even though it was already expected by the market, says Stephan Kautz, chief economist at EQI Investimentos.

“She shows a very strong determination to control inflation. Between the two interest rate decisions, there was a deterioration in inflation, reaching 9.1%, with pressured cores indicating that, in addition to energy and food, other products have pushed inflation up”, he explains.

Kautz considers that the decision was “quite strong”, signaling further interest rate hikes in the coming months and indicating that the terminal rate should be higher than previously expected by the ECB.

Victor Candido, chief economist at RPS Capital, observes that the speech of the ECB president, Christine Lagarde after the decision may have been read by the market as softer than expected, even with her indication of further interest rate hikes.

The reason is that Lagarde adopted a speech similar to that of the president of the Federal Reserve , Jerome Powell a few months ago, that a rise of 0.75 pp “is not normal”.

“It is linked to her talking about the issue of not continuing to rise at this rate, and that a good part of inflation is energy. It’s true, but the problems are the effects that energy produces on the other components of inflation”, says Candido.

Fontes ponders, however, that the market maintained the perspective of a rise in short-term interest rates, indicating that the speeches did not change an interpretation of a tougher posture.

For Candido, the inflationary dynamics in the euro zone for the coming months are worrying, without a resolution horizon for the war in ukraine and the prospect that energy prices will continue to rise.

“The European economy is collapsing with the gas issue, and if the rationing gets worse, it will greatly affect the industry, especially those most dependent on natural gas”, he explains.

He says the ECB’s challenge is to reconcile “very strong short-term inflationary pressure” with an economic slowdown already expected due to the energy crisis.

Commodities and foreign exchange

For Kautz, the ECB’s stance reinforces the prospect of recession for the region, which is added to the expected contraction of the US economy, also in a process of rising interest rates.

In the case of the euro zone, the economist credits the recession more to the problems of gas supply than to the rise in interest rates, but the movement worsens the situation.

In this sense, Kautz believes that there is a chance for central banks to broaden their inflation convergence horizons for the next few years, and not at the end of 2023, which would make room for the ECB and the Fed to raise interest rates at a slower pace.

For Brazil, he believes that the ECB’s stance “hampers our growth a little more next year, with global growth decelerating over the next few months. Brazil has an important exporting sector, of commodities, which may suffer a little in terms of growth”.

On the other hand, he points out that a slowdown in global inflation would help the Central Bank, since in recent months imported inflation, via energy prices, has been very high.

A more recessive global scenario would impact commodity prices, such as the Petroleum giving space for further price cuts by Petrobras and helping inflation to slow down, with a lower level in 2022 and 2023.

Added to this, Kautz sees room for the euro to appreciate against the dollar, with a weakening of the US currency also helping the exchange rate of emerging countries, such as Brazil.

The economist says that there is a discrepancy in the inflationary frameworks in Europe and the United States, forcing the ECB to maintain a tougher speech for longer, which tends to benefit the euro.

Candido notes that the prospect of a stronger recession in Europe harms the euro, opening space for a dollar stronger, which could harm emerging market currencies.

He assesses that the situation affects commodity prices from the perspective of lower demand, helping with Brazilian inflation. “There is a synchronicity of developed central banks in raising interest rates, and that brings down activity and makes commodity prices fall, which can help to decelerate our inflation.”

“Today, there is also a global problem with the production of commodities, there is no surplus, it is a problem of global restriction, and this should drive prices up, but the market projects a drop due to the deceleration”, he points out.

Fontes says that the more austere global posture impacts exchange rates, favoring countries that started the cycles of high interest rates earlier. The process helps the real not to have such a huge devaluation even with the high interest rates in the United States and Europe.

She believes that a global slowdown would help to reduce Brazilian inflation due to the decline in commodities, but this is still not a certainty.

“It’s not so obvious that we’re going to have slowing commodities. Iron ore, yes, but oil, linked to energy and an alternative to gas, maybe not, it depends on the commodity”, he ponders.

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