Investors around the world want to hear on Tuesday morning (12) the news that the worst of the financial market storm is over. Who will confirm or not is the Department of Labor of the United States, which will release at 9:30 am (Brasília time) data on the country’s inflation in August.
The CPI, an acronym for consumer price index, is widely expected to show slight deflation. The Bloomberg agency projects a negative rate of 0.1% in August compared to July. In the accumulated in 12 months, experts consulted pointed out that the index will fall from 8.5% to 8.1%.
Confirmation of this expectation will mean that the main economy of the planet is moving away from the inflation peak of 9.1% reached in June, the highest in more than four decades.
Why does this matter to Brazil? Those who follow the financial market closely point to the drop in American inflation at the moment as fundamental so that prices and interest rates can also fall here.
The cost of credit in Brazil depends on the rate in the United States, explains Ricardo Hammoud, professor of macroeconomics at Ibmec-SP. To attract and keep investments here, the country needs its sovereign bonds to offer interest rates high enough to compensate for political and economic instability.
American interest rates are currently at 2.5%. In Brazil, the basic Selic rate is 13.75% per year. “The difference [entre as taxas] is the Brazilian risk”, he says.
“A further reduction in the US CPI raises the prospect that if this pace continues, the Fed [Federal Reserve, o banco central americano] will not need to continue increasing interest rates quickly”, says economist Roberto Macedo, academic director of the Faculdade do Comércio de SP.
Raising interest rates is a measure adopted by central banks to curb inflation. More expensive credit reduces the circulation of money, and prices tend to fall. A side effect is rising unemployment. In the United States, however, there are almost two openings for every person looking for work.
Next Wednesday (21), the Fed is expected to announce a further increase in its interest rate. The market expects an increase between 0.50 and 0.75 percentage point. Tuesday’s CPI data won’t necessarily change what happens next week.
For Macedo, what matters to Brazil right now is that investors remain with the expectation that Brazilian interest rates will continue to give a much higher return than the US, especially when comparing the relationship between credit and inflation rates in the two countries.
This is also a time when investors tend to demand a higher risk premium from Brazil, as the main presidential candidates do not demonstrate concrete plans to rein in public spending.
Controlling expenses is the help the government could give to curb inflation and make the country more attractive to foreign investors. “The problem is that our politicians are leaving all the work to the Central Bank”, says Macedo.
Stock and exchange markets reflect since last week the expectation of investors about a possible fall in inflation in the United States. In practice, in Brazil and in the world, the dollar falls and the indices of the Stock Exchanges rise.
Daniel Miraglia, chief economist at Integral Group, looks at this move with caution. He recalls that the global markets went through a period of strong low, and movements like those of the last few days are normal. “The market has in the CPI a pretext for a recovery of prices of assets that were already very devalued”, he commented.
Several recent statements by Fed officials point to an over-enthusiasm on the part of the market regarding the slowdown in inflation and the expectation of a loosening of interest rates in the US.
Last week, Jerome Powell, chairman of the Fed, said the United States must continue to act energetically to reduce demand and contain pressure on prices to avoid a spike in inflation like the one seen in the 1970s and 1980s.
The situation mentioned by Powell had, about four decades ago, serious global effects. In South America, it provoked a public debt crisis.
At the time, the debt of Brazil and its neighbors was mostly pegged to the American currency, whose international price soared.
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