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Inflation bets rise with fear Brazil will not raise rates enough

(Bloomberg) – Sign up for the New Economy Daily newsletter, follow us @economics, and subscribe to our podcast Brazil’s inflation expectations are going in the wrong direction as investors fear the central bank may not be bold enough to keep prices down. pile up in inflation-linked bonds, seeking to hedge against an expected acceleration in prices, as officials stick to their forecast to suspend the rate hike cycle before borrowing costs reach the neutral level – observed around 5.5% to 6% in Brazil. For investors, this will not be enough to bring inflation under control, especially if commodities continue to rise and wholesale prices are passed on. The higher demand for these notes, which has even allowed the Treasury to double the size of the bank. ‘bond auction this week. , sends inflation breaks through the roof. Brazil’s two-year rate climbed 59 basis points this month to 5.43%, the highest in five years. Economists are also stepping up their forecasts and already see inflation above the 3.5% target next year, according to a weekly central bank survey. “The prices of raw materials, the behavior of exchange rates and this relatively accommodating position of the central bank are driving up demand for linkers,” said Pedro Dreux, chief financial officer at Occam Brasil Gestao in Rio de Janeiro. “The central bank trusts the models too much, but we think they should go faster.” Inflation fears are mounting around the world, forcing some central banks to rethink loose monetary policies adopted last year to tackle the economic impact of the pandemic. Brazil was one of the first countries in the developing world to embark on a tightening cycle, raising its benchmark rate from 150 basis points since March to 3.5%. Yet inflation expectations continue to decline. ‘increase and the numbers have exceeded estimates. Consumer prices in Brazil rose 6.76% in April from a year earlier, the most since late 2016, amid a recovery in prices of agricultural products and metals and an improvement in growth prospects from the country. As the number of new Covid-19 cases and deaths slows, banks including Goldman Sachs Group Inc. and Barclays Capital Inc. have raised the forecast for gross domestic product for this year. on upcoming consumer prices. The IGP-M index, more focused on wholesale prices, is around 32%, more than 25 percentage points above the official inflation index. While the two metrics don’t necessarily work together, this gap has never been higher and suggests that companies may pass higher production costs on to consumers. In addition, recent droughts are causing electricity prices to rise which could last until the end of the year. It is not only Brazil where expectations of rising bond market prices are increasing, with soaring commodity prices, central bank liquidity and a recovery the economy is combining to lift the breaks in water in the world In the United States, the world’s largest bond market, the 5-year breakeven rate on treasury bills jumped this month to 2.82%, a level not seen since 2005 and well over. above the Federal Reserve’s inflation target. the bank’s plan to remove only part of the monetary stimulus that currently underpins Latin America’s largest economy. Officials said the price pressures were temporary, and in minutes of their last meeting they said inflation would fall below the 2022 target if the policy rate was raised to neutral in the current cycle. Because of this, they have indicated that they plan to halt tightening later this year, but traders disagree with the central bank. Swap rates stand at over 300 basis points in further rate hikes this year, which would take the Selic to 6.5%, above the neutral level. They also forecast a further 89 basis point tightening in the first quarter of 2022. In recent weeks, officials have said the path to “partial normalization” is all they can point to, although that could be adjusted if economic conditions change. This means the BCB needs to keep raising rates to avoid contamination of next year’s forecasts, ”said Caio Megale, chief economist at XP Investimentos, who expects the central bank to extend the cycle. tightening. does not meet belligerent market expectations and that is why the demand for inflation linked bonds is so strong. On Tuesday, the Brazilian Treasury raised 19.5 billion reais ($ 3.7 billion) through the auction of 4.7 million linkers, known locally as NTN-Bs, more than double the amount of tickets offered during the previous two weeks. On Thursday, the Treasury increased the size of an offering of floating rate bonds while reducing the amount of fixed rate notes.In addition to inflation, the central bank must also take into account the fiscal outlook and the fact that the economy is still suffering from the impact of the pandemic, even as the outlook begins to improve. A third of Brazil’s public debt is tied to the Selic rate and further hikes would increase interest charges, adding pressure on public accounts. Bloomberg LP


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