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Understand how the rise in interest rates in the US impacts the Brazilian economy

the announcement of Federal Reserve this Wednesday (16) about the first interest rate hike in U.S since 2018, of 0.25 percentage point, should bring as the main consequence to the Brazilian and world economy, a strengthening of the dollar relative to other currencies.

The increase, with the interest rate now in the range of 0.25% to 0.50% per year, was justified by the municipality due to the need to combat inflation in the United States, which reached the highest level in the last 40 years. It is not a different scenario from the Brazilian one, but the central bank From here, the interest rate hike cycle started earlier, in March 2021.

But a single increase by the US Central Bank will not be enough to solve the problem. The Fed said in a statement that it expects the interest rate to end 2022 between 1.75% and 2% a year, and that it will continue to rise in 2023, which should further strengthen the advantages for the dollar.

dollar and real

Bonds issued by the US Treasury are already traditionally attractive to investors because they are seen as safe and linked to the world’s largest economy. When the fees rise in the country, they become even more advantageous, which stimulates a flow of investment for them.

It is this flow that makes the dollar strengthen and appreciate in relation to various currencies, especially emerging markets, such as Brazil, which suffer from the stampede of investors.

Because of this, a common consequence of higher interest rates in the US is the appreciation of the dollar against the real. On a day-to-day basis, this increases the price of imported products, from commodities to high-tech items. But the movement can also affect other types of products, whose production demands imported.

In case of Petroleumfor example, if the currency is valued against the real, the price of the commodity —always traded in dollars abroad—, and the fuelstend to rise, and as Brazil is heavily dependent on road transport, higher costs lead to increases in a number of products, even if they are produced domestically.

The consequence ends up being a rise in inflation, which is already at high levels in Brazil, above 10% in the accumulated in 12 months. This is what happened in 2021, when the dollar rose and touched R$5.80 due to the perception of fiscal risks in the country, worsening the economic situation. However, this time the impact may end up being softened.

The real entered a trend of appreciation against the dollar at the beginning of 2022, starting from levels above BRL 5.50 to between BRL 5.10 and BRL 5. This movement is linked to the departure of investors from the stock exchanges. of US values ​​precisely because of the prospect of rising interest rates.

In search of good opportunities, they migrated to markets seen as cheap and linked to products whose prices have risen, commodities, in the case of Brazil. The flow to the Brazilian market was reinforced by another important element, the high interest rates, above 10%.

The attraction tends to remain at some level because the Central Bank has already signaled that it will not end the cycle of high Selic rate soon, and the market expects it to end the year at 13% a year due to new inflationary pressures with the war in ukraine.

With a large difference between the Brazilian and US interest rates, investors can leave in smaller amounts, and even continue to enter, which would help the real to maintain the appreciation trend or the current level.

Uncertain future

Camila Abdelmalack, chief economist at Veedha Investimentos, also says that, as it is an expected move, the interest rate hike is already “priced in”, in market jargon, that is, it has already been taken into account in investment decisions. If the Fed follows the expectations, little tends to change in the trends that currently occur in the Brazilian stock market and in the dollar.

André Perfeito, chief economist at Necton, says that the real still has room for appreciation, but that the Federal Reserve’s decision not to cut, at the March meeting, the programs to stimulate the economy established during the pandemic can generate noise that would harm the real.

“The decision did not please investors, and should reinforce the feeling that higher interest rates will be needed there”, he says. If the expectation is that interest rates rise more, the dollar tends to advance as well.

Another problem is the war in Ukraine, a type of event that increases aversion to investments seen as risky, and encourages the search for assets considered safer, such as the dollar. Any negative news about the conflict, combined with the new cycle of interest rate hikes in the United States, could harm the real.

Understand how the rise in interest rates in the US impacts the Brazilian economy

The combination of high interest rates in Brazil and the United States and risk aversion with the war is also negative for the Brazilian stock exchange. There is a risk of an outflow of investmentswith a migration to the fixed income of the two countries, which would harm the listed companies.

It will also be necessary to take into account the prices of the commodities. If tensions such as the war in Ukraine and the mismatch between demand and supply cause prices to rise a lot, even a stronger real may not be enough to balance the highs, worsening the inflation scenario.

But if the opposite occurs, with the war being resolved peacefully, risk aversion reducing and the Fed acting in line with expectations or even more smoothly, Brazil could end up benefiting from the maintenance of the current flow of investments.

Patricia Palomo, asset manager and advisor to Planor, believes that it is difficult to guarantee the currency’s behavior today. “The dollar is a volatile, fluid resource. Foreigners want asymmetries, it is not a bet on Brazil. If another place shows asymmetry, they will migrate there”.

*With information from Pedro Zanatta, from CNN Brasil Business

Source: CNN Brasil

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