Real: Interest rate expectations are supportive, but gains may be limited
2024-12-13
■ The Brazilian central bank has expanded its interest rate hike for three consecutive meetings, taking into account the implied inflation risk and the possibility of further rate hikes
■ Interest rate expectations support the Brazilian real, but its gains are expected to be limited due to concerns over fiscal reconstruction and other issues
On December 10th, the Brazilian Institute of Geography and Statistics released a year-on-year increase of 4.87% in the Extended National Consumer Price Index (IPCA) for November, accelerating for three consecutive months from the low point in August (4.24%) and reaching the highest level since September 2023 (5.19%). Affected by widespread drought, crops, meat, and other food prices have risen, while beverage and transportation costs have also increased prices. In addition, the depreciation of the real has led to an increase in import prices; coupled with Brazil being one of the world's major beef exporting countries, export growth has also contributed to high prices. IPCA has exceeded the target range set by the Brazilian central bank for two consecutive months (1.5% -4.5%).
The Brazilian Central Bank (BCB) decided at the COPOM meeting on December 11th to raise the policy rate by 1.00% to 12.25%. All members unanimously passed the decision, and the interest rate hike reached 1.75% after three consecutive meetings, following September (0.25%) and November (0.50%). The statement states: "Considering that inflation may develop towards a more unfavorable scenario, it is expected that similar adjustments will be made in the next two meetings," and "the total size of the tightening cycle will depend on a firm commitment to achieving the inflation target. According to this guidance, the market has begun to anticipate that the Brazilian central bank will raise interest rates by 2.00% at its meetings in January and March 2025.
The Brazilian real exchange rate has risen. Against overheating in personal consumption, which accounts for about 60% of GDP, Brazil's real GDP grew by 4.0% year-on-year in the third quarter, with the growth rate accelerating. Supported by the pace of interest rate hikes by the Brazilian central bank, the market is paying attention to the widening interest rate differential between Brazil, the United States, and Japan. The real has rebounded against the US dollar from its all-time low of 6.11 in November and against the Japanese yen from its low of 24 yen on December 3rd. Although the fundamentals are sound, whether the real can return to an upward trend still depends on the following three key factors: (1) whether the market's confidence in Brazil's fiscal reconstruction can be restored; (2) Can the Chinese economy recover; (3) Will the next Trump administration impose import tariffs. The real is expected to only stop at the rebound stage in the short term.
■ Interest rate expectations support the Brazilian real, but its gains are expected to be limited due to concerns over fiscal reconstruction and other issues
On December 10th, the Brazilian Institute of Geography and Statistics released a year-on-year increase of 4.87% in the Extended National Consumer Price Index (IPCA) for November, accelerating for three consecutive months from the low point in August (4.24%) and reaching the highest level since September 2023 (5.19%). Affected by widespread drought, crops, meat, and other food prices have risen, while beverage and transportation costs have also increased prices. In addition, the depreciation of the real has led to an increase in import prices; coupled with Brazil being one of the world's major beef exporting countries, export growth has also contributed to high prices. IPCA has exceeded the target range set by the Brazilian central bank for two consecutive months (1.5% -4.5%).
The Brazilian Central Bank (BCB) decided at the COPOM meeting on December 11th to raise the policy rate by 1.00% to 12.25%. All members unanimously passed the decision, and the interest rate hike reached 1.75% after three consecutive meetings, following September (0.25%) and November (0.50%). The statement states: "Considering that inflation may develop towards a more unfavorable scenario, it is expected that similar adjustments will be made in the next two meetings," and "the total size of the tightening cycle will depend on a firm commitment to achieving the inflation target. According to this guidance, the market has begun to anticipate that the Brazilian central bank will raise interest rates by 2.00% at its meetings in January and March 2025.
The Brazilian real exchange rate has risen. Against overheating in personal consumption, which accounts for about 60% of GDP, Brazil's real GDP grew by 4.0% year-on-year in the third quarter, with the growth rate accelerating. Supported by the pace of interest rate hikes by the Brazilian central bank, the market is paying attention to the widening interest rate differential between Brazil, the United States, and Japan. The real has rebounded against the US dollar from its all-time low of 6.11 in November and against the Japanese yen from its low of 24 yen on December 3rd. Although the fundamentals are sound, whether the real can return to an upward trend still depends on the following three key factors: (1) whether the market's confidence in Brazil's fiscal reconstruction can be restored; (2) Can the Chinese economy recover; (3) Will the next Trump administration impose import tariffs. The real is expected to only stop at the rebound stage in the short term.