Amid the fight between the government and BC, Brazilian assets lose favorable momentum abroad

The main domestic assets are on track to end the week with a decline, and market participants warn that the real and the Ibovespa may suffer even more in the coming days amid the possibility that the Central Bank gives in to government criticism over the conduct of the monetary policy, missing the chance to take advantage of an external scenario favorable to Brazil.

After being punctually traded below BRL 5 for the first time since June last Thursday, the dollar has already risen about 5%, with 1.8% this week alone. The Ibovespa has also felt the tensions between the Central Bank and the government, although at a lower intensity than that observed in the exchange market, and accumulated a drop of around 0.66% this week.

A good part of these movements reflect investor concerns with the growing chorus of criticism of the BC by President Lula and allies, who complain about the high level of the Selic rate and question the autonomy of the autarchy. The mood worsened on Thursday (9), after news that the government’s economic team would be studying to anticipate a review of the country’s inflation targets and possibly raise the target to be sought by the monetary authority.

Next week will bring two crucial events for the development of this debate: an interview by the president of BC, Roberto Campos Neto, to the Roda Viva program on Monday (13), and the first meeting in the new government of the National Monetary Council, responsible for define the inflation targets, scheduled for Thursday.

Citi said in a report this Friday that, although the political climate to change the BC’s independence law in the short term seems timid, a revision of the inflation target is “much more likely”. The US bank pointed out that, although the country’s official inflation targets are commonly defined at the June meeting of the CMN, nothing prevents the objectives from being changed at the meeting next week.

Rafaela Vitória, chief economist at Banco Inter, says that the debate on the inflation target is healthy and should exist, but she considers that “raising the target at this moment removes the market’s confidence in the monetary policy and increases its cost”.

For some market participants, what worries the most are speculations that Campos Neto would be willing to give in to Lula’s pressure for a higher inflation target and a reduction in interest rates, currently at 13.75%.

“Campos Neto’s vision has to be monetary and with a global perspective”, said Luciano Feres, economist and CFO of Somus Capital, amid the expectation that the BC president will offer some encouragement to Brazilian assets on Monday. “He’s a person who has a very assertive view of fiscal responsibility. Everyone will want to know what he thinks, but I think he’s going along those lines.”

In his only recent comment on the debate surrounding BC autonomy, Campos Neto stated that independence is important because it disconnects the monetary policy cycle from the political cycle. “The more independent you are, the more effective you are,” he said at an event in Miami on Tuesday.

The BC did not respond to a Reuters request for comment on news that Campos Neto was willing to change inflation targets. The Ministry of Finance, on the other hand, stated that it does not anticipate guidelines or topics that will be discussed at the National Monetary Council.

WITHOUT SURFING

While waiting for a conclusion to the “soap opera” between BC and government, the market regrets that Brazilian assets have lost the opportunity to surf a recent wave of appetite for risk abroad, which gained strength from the end of last year amid China’s economic reopening and now dimmed hopes that the Federal Reserve is close to ending its monetary tightening.

The dollar index against a basket of strong currencies, for example, has lost more than 7% since November last year, a sign of improvement in global risk appetite. In the same period, between ups and downs, the US currency gained 1.5% against the real.

“You have China reopening, the United States with this inflation problem, Europe at war. We joke that, currently, Brazil is the ‘best of the worst’. So the money should flow to Brazil. You see, in the few quiet moments that we had at the beginning of the year, the dollar has already hit R$ 5.00.

“As long as we have this stress, this clash, I think this generates great insecurity for the main economies to invest and believe in Brazil.”