Future interest rates close with a firm drop after IPCA below expectations

DI rates closed Friday with firm drops, close to 20 basis points across several maturities, after June inflation in Brazil was lower than expected, reinforcing the prospect of a cut in the Selic base rate in August.

At the end of the afternoon, the DI (Interbank Deposit) rate for January 2028 was at 13.85%, a drop of 19 basis points compared to the adjustment of 14.04% in the previous session. The DI for January 2035 was 14.265%, down 17 basis points from 14.431.

During the week, these rates accumulated drops of 25 and 14 basis points, respectively.

The IBGE (Brazilian Institute of Geography and Statistics) reported that the IPCA, the official inflation index, rose 0.16% in June, below the rate of 0.58% in May and the 0.31% projection of analysts interviewed by Reuters. In the 12 months to June, inflation was 4.64%, below the projected 4.80%.

The opening of the indicator also revealed a deceleration in prices between May and June. The services rate went from 0.40% to 0.34%, while the underlying services rate, according to Suno Research, went from 0.40% to 0.22%. Industrial goods inflation slowed from 0.32% in May to 0.11% in June.

The average rate of core inflation - which disregards more volatile prices - monitored by the Central Bank went from 0.45% to 0.21%, according to Suno. Inflation for labor-intensive services, however, accelerated from 0.50% to 0.55%.

"The June result is very positive news for the Central Bank, as it removes part of the pressure from the short-term inflationary scenario. Still, it will be necessary to monitor the next data to confirm whether the slowdown trend will continue", said Gustavo Sung, chief economist at Suno Research.

For some analysts, the lower-than-expected IPCA result strengthens the prospect that the Central Bank's Copom (Monetary Policy Committee) could promote another 25 basis point cut in the Selic at the beginning of August - something that was already being priced in the market.

"Undoubtedly, the (IPCA) number reinforces the perception that the Copom will continue cutting the Selic. In August it seems right to us", assessed the director of consultancy firm Wagner Investimentos, José Faria Júnior, in a report. "The dynamics of food and oil prices will determine the expansion of the cutting cycle."

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Last Wednesday - most recent update - the pricing of Copom options traded on B3 indicated a 72% chance of a 25 basis point Selic cut in August, against a 26.9% probability of maintaining the base rate at 14.25%. Three weeks earlier, on June 17, the picture was the opposite, with 27.5% for a 25 basis point cut and 67% for maintenance.

The decline in future rates in Brazil this Friday went against the trend abroad, where Treasury yields firmed up in the afternoon. Brent oil remained stable throughout the day, close to US$76 per barrel, even though the scenario of the war in the Middle East remained cloudy.

Tracking data showed that liquefied natural gas tankers have passed through the Strait of Hormuz in recent days, while 22 vessels linked to Japan have left the Persian Gulf since Tuesday, but overall daily traffic has slowed as tensions between the US and Iran have intensified.

In the morning, US President Donald Trump said the country had agreed to negotiate with Iran, after Tehran called for discussions to continue, but added that the ceasefire between the two nations was "over."

At 4:33 pm, the ten-year Treasury yield - a global benchmark for investment decisions - rose 2 basis points to 4.561%.

Source: CNN