BC should reduce the pace of tightening in the face of inflationary relief and a drop in activity, projects BofA

Bank of America expects that signs of relief on the inflationary front and evidence of a slowdown in economic growth will lead the Central Bank of Brazil to reduce the dose of monetary tightening already at the next Copom meeting, in February.

David Beker, head of Brazil’s economy and Latin America strategy at BofA, told reporters on Wednesday that the private lender believes Brazilian consumer inflation peaked in November, when the IPCA rose by 10 .74% in 12 months.

“Although the Central Bank has said that it is going to raise another 150 basis points, we believe that the evolution of the scenario until then will allow the BC to reduce the intensity to an increase of 100 basis points in February”, stated Beker , forecasting a Selic rate of 10.75% per year at the end of the current monetary tightening cycle.

Basic interest rates are currently at 9.25% per year, after raising 1.5 percentage points at the last Copom meeting last week.

For the IPCA, BofA expects a rate in 12 months of 10.1% at the end of 2021 and 5.0% in 2022 — the ceiling for next year’s target of 3.5% with a tolerance margin of 1.5 percentage point plus or minus.

“There will be disinflation, but it won’t be enough to bring inflation close to the center of the target, which, in our view, only happens in the following year.” BofA expects consumer prices to rise by 3.5% at the end of 2023, a year whose target is 3.25%.

In addition to the perception that the IPCA in 12 months should cool down ahead, Beker stated that a strong economic slowdown expected for next year will also be a determining factor for the Central Bank in the decision to slow down the rise in interest rates.

BofA expects Brazil’s growth to expand by 4.9% in 2021 and decelerate to 1.1% in 2022, with downside risks to the projection.

Although the rate forecast by BofA for next year represents a significant deterioration compared to the previous year, it is still much more optimistic than the median of projections in the most recent BC Focus survey, which points to a GDP expansion of 4.65% in 2021 and only 0.5% in 2022.

Beker said that BofA’s more promising vision reflects expectations of some improvement in the services sector, which has an important weight in the economy. “And we cannot forget that there have been a lot of concessions made in recent years that generate a ‘pipeline’ (channeling) of investments,” he added.

Even so, next year will bring “a challenging world”, mainly from the perspective of emerging countries, according to Beker, due to the process of limiting liquidity and interest rate increases in the United States, which “creates a difficulty in terms of appreciation of emerging market currencies”.

In addition, in Brazil, the presidential elections will pose strong uncertainties, as they are likely to hamper the progress of reforms seen by financial market participants as essential, amidst a further deterioration in Brazil’s fiscal credibility.

On this front, Beker stated that what most raises concern about the health of public accounts is that “we have a very rigid Budget, we have difficulty in making (spending) cuts and we have pending reforms; the administrative, for example, is late “.

He also stated that, in the future, a combination of low growth with higher interest rates is also a reason for fear, as it would lead to difficulties in stabilizing the debt/GDP ratio.

“The market’s view is that the fiscal structure has weakened. Our fiscal risk, ultimately, will depend a lot on the election result and what the new president’s agenda will be,” said Beker.

Interest rate hikes bring risks with global debt at $226tr, says IMF

The IMF (International Monetary Fund) said on Wednesday that global debt rose to $226 trillion last year, the biggest jump in a year since World War II, and will be at risk if global interest rates rise further faster than expected and growth is unstable.

On the institution’s blog, IMF officials said the Covid-19 pandemic caused debt to reach 256% of global GDP in 2020, an increase of 28 percentage points. Government loans accounted for just over half of the $28 trillion rise, but private debt between non-financial corporations and households also reached new highs.

Advanced economies and China accounted for 90% of the increase in debt, made possible by low interest rates. Debt advanced less in other developing countries, which were hampered by generally higher borrowing costs and limited access to finance, the IMF said.

IMF Fiscal Affairs Director Vitor Gaspar and other officials said higher interest rates will lessen the impact of higher fiscal spending and will make concerns about debt sustainability intensify.

“The risks will be heightened if global interest rates rise faster than expected and growth falters,” officials wrote.

“A significant tightening of financial conditions would increase pressure on the most indebted governments, households and businesses. If the public and private sectors are forced to deleverage simultaneously, growth prospects will be jeopardized.”