Interest rates rise with rising inflation and rising fuel prices

Reference interest contracts for bank loans and financing to Brazilian consumers rose again this Friday (11), the day that a mega-increase in Petrobras fuels came into effect and, in addition, there was the disclosure of the highest inflation monthly for February since 2015.

With two consecutive daily advances, the short-term DI (Interbank Deposits) rate –for January 2023– ended the day at 13.2% per year. A rise of 0.29 percentage point compared to 12.9% at the close of last Wednesday (9), before the announcement of high prices for gasoline, diesel and gas.

DI contracts are negotiated exclusively between banks, but serve as a reference for financing and loans in general. The rise in DIs reveals that the market is expecting a more aggressive increase in the basic interest rate (Selic) by the Central Bank. Making credit more expensive is one of the tools that the monetary authority has to try to curb inflation.

The basic interest rate in Brazil is 10.75% per year, one of the highest in the world in relation to the country’s annual inflation expectation, which is 5.65%. Analysts estimate that the Selic will rise more and end 2022 above 12%.

“The IPCA [inflação oficial] came worse than expected”, commented Jansen Costa, partner at Fatorial Investimentos. “With these data, the expectation of interest rate increase by Copom is now higher”, he said. He also reinforced that the impact of the increase in gasoline will only be reflected in official inflation starting next month.

While investors interpreted the internal signs of the economy and the evolution of the effects of the Ukraine war on global finance in the early hours of this Friday, Brazil’s stock exchange and exchange rate oscillated between highs and lows.

In the afternoon, the pessimistic bias was consolidated. The Ibovespa, the country’s stock market benchmark, plunged 1.72% to 111,713 points. The indicator dropped 2.41%. That’s the biggest weekly drop since the 3.1% decline in the week ended November 19 last year. In the accumulated of 2022, the Exchange sustains a high of 6.57%.

Sectors such as construction and retail, traditionally affected by high interest rates, helped to pull the stock market down. The negative highlight was the construction company MRV, which sank 11.89%.

The dollar rose 0.71%, quoted at R$5.0530. On the week, the currency retreated 0.49%. High interest rates tend to attract foreign investors to the country and this, in theory, should generate a downward trend in the US currency due to the inflow of dollars into the country. But the result this Friday was different.

The geopolitical crisis in Europe and inflation in the United States drove the exchange rate hike this session, according to Fernanda Mansano, chief economist at investor platform TC. “The dollar today was influenced by international issues,” she said.

On the 16th day of the Ukrainian war, Russian troops expand attacks around the Ukrainian capital Kiev. The escalation of the conflict raises concerns about the consequences for the world economy.

It is in assets linked to the dollar that investors seek protection in periods of uncertainty. This Friday, the American currency appreciated against 19 among 24 currencies of emerging countries present in a list monitored by the Bloomberg agency. The real was the second currency with the worst spot return against the US dollar.

With no prospects for a solution to the conflict, the expectation of a severe reduction in the supply of Russian oil continued to put pressure on the commodity’s rise in the international market. A barrel of Brent was up 2.76% to $112.35 (R$564.54) earlier in the evening.

Petrobras shares did not follow the commodity’s appreciation. On the contrary. The government-controlled oil company lost 3.59%, giving back all the 3.5% gain from the day before that had been obtained with the announcement of the fuel hike.

Oil and oil products are at the center of global inflationary pressure. In the United States, the increase in consumer prices accumulated in 12 months reached 7.9% in February, the worst result for the month in 40 years.

Analysts at Genial Investimentos estimate that the Fed (Federal Reserve, the American central bank) will start the cycle of hikes in the basic interest rate in the United States next week, with an increase of 0.25 percentage point to end 2022 with interest of 2 .5% per year. Today the American rate is practically zero.

Interest rate hikes could attract investors to US Treasuries. This often reduces the availability of capital for investments in shares of companies around the world. In addition, more expensive credit increases the operating cost of indebted companies.

In the US stock market, the benchmark S&P 500 index fell 1.30%. The Dow Jones indicator, which concentrates companies of lower value and less dependent on credit, dropped 0.69%. Nasdaq, an exchange that brings together companies that need cheap credit to grow, plunged 2.18%.