President Luiz Inacio Lula da Silva’s economic team is growing worried that Brazil’s central bank may soon be forced to reduce the pace of interest rate cuts to fight the impact of rising US Treasury yields on domestic inflation, according to a government official with knowledge of the matter.
The recent rise in Treasury yields has reduced investors’ appetite for risk across the globe, with the Brazilian real among the worst-performing emerging-market currencies, weakening more than 6% against the dollar over the past three weeks. A weaker real is likely to fuel inflation as imports become more expensive.
Locally, Brazil’s fiscal outlook has also became less clear as lawmakers debate, and make changes to, a series of revenue-boosting measures proposed by Finance Minister Fernando Haddad. The government needs to increase tax income to deliver on its promise to eliminate the primary fiscal deficit next year without cutting expenses.
Yet the moves seen in the Treasury market, which reflect the possibility of additional interest rate hikes by the Federal Reserve, are having a disproportionately bigger impact on the outlook for Brazil’s monetary policy, said the official, requesting anonymity because the discussion isn’t public. Brazil’s central bank has already delivered two consecutive cuts of half a percentage point to the benchmark Selic, bringing it down to 12.75% in September. It has signaled plans to keep the same pace of easing at least until the end of the year, “if the scenario evolves as expected.”Investors, however, have been adjusting their bets on how long and aggressive Brazil’s easing campaign will be.
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