04/18/2024 – 7:05
It was not just the dollar that reacted to the change in the fiscal target. The increase in uncertainty about public accounts also impacted projections about interest rates, with lower expectations that the Central Bank will maintain the current pace of cutting the Selic rate, currently at 10.75% per year.
+ Fiscal target: Lula government changes framework and postpones adjustment of public accounts; understand
The changes affect projections for the next meeting of the Monetary Policy Committee (Copom), in May. At the beginning of last week, the market saw an 86% chance of the BC making a further reduction of 0.5 percentage points (pp) in the Selic. Now, the percentage has risen to 63%, considering data from Copom Option contracts released by B3.
Meanwhile, the probability of a smaller reduction, of 0.25 pp, went from 9% to 20%, and that of maintenance jumped from 1.7% to 14%.
The changes are also reflected in expectations for the June meeting. Previously, the numbers showed a 66% probability of a 0.25 pp cut, a 14% probability of a 0.5 pp reduction and a 15% probability of maintaining the rate. Now, the percentages are 53%, 8.5% and 34%, respectively.
In the interest curve, it is also possible to see an increase in market distrust. On Tuesday, the 16th, it started pricing more than 50% of the chance of a Selic cut at just 0.25 pp, and not at 0.5 pp as had been signaled by the BC itself in recent communications. On Wednesday, the 17th, the curve rose again and began to price an 84% chance of the Selic cut in May being just 0.25 pp, after the BC president himself, Roberto Campos Neto, argue that uncertainty about public accounts, combined with the external scenario, could reduce the intensity of interest cuts.
Understand market nervousness
The increase in uncertainty came in the wake of the economic team's announcement about changes in the targets for public accounts in 2025 and 2026. The statement came on Monday, the 15th, and represents a postponement of the government's plans to put the numbers in the black.
Furthermore, there are doubts about the government's ability to comply with the new fiscal framework, which came into force less than a year ago. This is because there is a dependence on increasing revenue to comply with the rule, and it is not known for sure how this will happen.
“The expectation was that monetary and fiscal policy would go hand in hand. As this apparently is not happening, it is possible to estimate slightly worse data regarding inflation and interest rate reduction policy”, analyzes Alvaro Bandeira, Coordinator of the Economics Commission at APIMEC Brasil.
Also pointing out negative consequences of the news about the fiscal target, Ricardo Martins, chief economist at Planner Investimentos, mentions that “non-compliance will fundamentally reflect on the faster growth of public debt and the risk premium demanded by the market” – which means higher interest rates .
Aline Rosa, economist and partner at Matriz Capital, points out that, after the latest developments in Brasília, “it is plausible that the Copom will maintain a prudent stance in the next meetings”. But, despite the markets' reaction, she recalls that “the Copom had already signaled concerns about the evolution of the fiscal scenario, conditioning future movements to the consolidation of inflation convergence towards the target”.
The external scenario also weighs
In a similar way, Felipe Berenguer, macroeconomic and political analyst at Levante Inside Corp, believes that “we can see a change in tone in the next minutes” of the Copom, but not just due to internal noise.
“What can be said is that the signaling is quite bad and is being made at a time when the global scenario is already quite adverse, whether due to the escalation of conflicts in the Middle East, or due to the review of interest rate cut expectations. in the United States.”
Given the events, Pedro Afonso Gomes, president of the regional economic council of Corecon-SP, points out that “it is not surprising that the Focus bulletin came with a slightly higher expectation for the Selic rate”.
“Of course there were some price increases and we are already seeing it through the indices, but they are correctable throughout the year. What cannot happen is a certain political and geopolitical imbalance, in the international case, that affects prices”, he explains.
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