MARKET NEWS

By Maria Eloisa Capurro

(Bloomberg) -- Brazil central bank’s incoming Governor Gabriel Galipolo signaled it’s unlikely policymakers will change guidance for two new rate hikes of 100 basis points each, pushing back on investor bets on even steeper jumps.

The central bank took a clear and transparent step toward putting rates at a more restrictive level, Galipolo said in reference to the guidance issued at last week’s rate-setting meeting. Board members were very courageous with their message and know exactly where monetary policy is heading, he said.

“The bar is high for any changes to guidance,” Galipolo told reporters in Brasilia on Thursday. “It was important to signal what will happen in the next two meetings.”

Interest rate futures declined following Galipolo’s remarks, as investors backed off bets of a hike of nearly two percentage points at the next policy meeting in January. Part of the market’s views stem from fears that the government will fail to significantly cut spending and bolster public accounts. Earlier in the day, the central bank also lifted its economic growth forecasts for this year and next, further reinforcing board members’ pledge for higher borrowing costs to tame inflationary pressures from overheated activity.

The bank expects gross domestic product to expand 3.5% this year, marking the fourth straight increase in its estimates that had previously stood at 3.2%, according to the quarterly inflation report published Thursday. By comparison, analysts surveyed by the monetary authority see the economy rising 3.42% in 2024 while the government forecasts 3.3% growth. 

For 2025, the bank now sees GDP expansion at 2.1%, up from the prior estimate of 2%. 

Latin America’s largest economy continues to surprise both analysts and policymakers with its resilience to high interest rates. Activity is getting a boost from public spending that’s also stoking market fears of debt crisis. 

For next year, board members expect stronger agricultural production. Overall, Brazil’s economy remains “robust” with activities linked to the economic cycle “growing strongly,” they wrote in the inflation report.

Currency Intervention

Investors are dumping the Brazilian real as skepticism grows over President Luiz Inacio Lula da Silva’s pledges to shore up government coffers. The announcement of a plan to cut 70 billion reais ($11.1 billion) in spending in two years and also introduce tax breaks for low-income workers cemented the idea that the head of state is still seeking to boost growth through consumption. 

Analysts see the government missing its fiscal target next year and estimate the spending cut will have a smaller impact on public accounts, central bankers wrote in the report. “Overall, the fiscal package doesn’t seem to have resulted in a positive initial impact around analysts perceptions,” they added.  

Meanwhile, a strong capital outflow has prompted the central bank to step into the currency market. The monetary authority sold $8 billion in the spot market alone on Thursday. 

Speaking alongside Galipolo, outgoing bank Governor Roberto Campos Neto said the institution has seen atypical outflows, adding that policymakers intervene in the foreign exchange market when there are signs of dysfunction.

The real remains the worst performer among major currencies, weakening about 21% this year. A “sharp” exchange rate depreciation is adding to prices pressures, central bankers wrote in the report. 

On top of that, policymakers see higher-than-expected food prices contributing to annual inflation that will remain above the bank’s 3% target. 

Analysts surveyed by the central bank see annual inflation running well above the 3% goal through at least 2027. A weaker exchange rate fans consumer price pressures by making imports more expensive.

--With assistance from Andre Loureiro Dias.

(Re-tops story with comments from incoming Governor Gabriel Galipolo)