Interest rates opening anew with fiscal scenario pressuring the BC

Long-term interest rates opened today for the second consecutive day, reflecting the increasingly unanimous view in the market that the Central Bank will need to act more forcefully to achieve the inflation target.

The NTN-B maturing in 2033, which closed at IPCA + 6.46% yesterday, rose today to IPCA + 6.57%, with the market still digesting the Central Bank’s statement that it will do whatever it takes to control inflation.

The Central Bank stated that the pace and magnitude of the rate hike “will be dictated by the firm commitment to convergence of inflation to the target and will depend on the evolution of inflation dynamics, especially the components most sensitive to economic activity and monetary policy, inflation projections, inflation expectations, the output gap, and risk balance.” (In other words: we’re all doomed.)

Meanwhile, the 10-year fixed-rate opened 0.27 basis points higher (from 12.06% to 12.34%) — implying that implied inflation also increased by 0.16 basis points, unlike yesterday, when the rise was only in real interest rates.

The dollar and the stock market were also affected. The Ibovespa plummeted 1.55% today, while the dollar rose 1.5% and once again surpassed the R$ 5.50 mark.

“It’s not just a question of medium and long-term fiscal sustainability. There is a growing concern about short-term fiscal effects,” said Rodrigo Moraes, CIO of BR Partners’ wealth management. “It is becoming increasingly clear that with fiscal stimulus boosting activity and generating income, the Central Bank will have to raise interest rates more than previously expected.”

While yesterday the interest rate curve priced in a 0.55 basis point increase at the next Copom meeting on November 7th, and a 0.45 basis point increase for the meeting on December 12th, today it began to price in a 0.60 and 0.48 increase, respectively.

This change in expectations led to many stops in interest rates today, with traders and investors — especially foreigners who were betting on a rate cut — throwing in the towel on their positions.

The ‘stop’ movement helped intensify the rate opening.

BR Partners’ CIO also noted that the multiple wildfires in the country in recent weeks are leading the market to question “whether this could have an impact on inflation, with an increase in energy tariffs, for example.”

Another factor intensifying volatility is the expectation regarding the Government’s bi-monthly revenue and expense report, scheduled to be published early this evening.

Given that budget projections are not being met, the market expects the government to signal expense cuts.