High interest rates in Brazil: fall is postponed, but thesis remains valid

The Brazilian interest rate is experiencing its worst moment in the last 20 years, according to an assessment by Encore Asset partner, João Luiz Braga. During an interview with the program "Café com Investidor", Braga stated that with the Selic having undergone two cuts and reaching 14.5%, the scenario that seemed promising at the beginning of the year underwent a turnaround in the face of geopolitical uncertainties and external inflationary pressures.

Initial optimism gave way to caution
At the beginning of the year, the prospect of a significant drop in interest rates was supported by macroeconomic and sectoral data that pointed to a slowdown in the economy. With inflation approaching the upper margin of the inflation target, the analyst assessed that maintaining a real interest rate of 12% to prevent a future inflationary outbreak "does not make any sense". Optimism, however, was gradually replaced by caution.

The change in scenario came with the uncertainties generated by international conflicts, which pushed oil and fertilizer prices up. As a consequence, inflation rose again. The INCC, an index that measures construction inflation, is already around 10%, and food inflation is also expected to put pressure on the indices throughout the year, especially given a less favorable outlook for the agribusiness sector.

"High interest rates do not resolve external shocks"
For businesspeople, there is an important distinction between demand inflation and external shocks. In the current scenario, keeping interest rates high would not be able to solve supply problems generated by geopolitical tensions, such as the closure of the Strait of Hormuz. On the contrary, the combination of an external shock with high interest rates can be "cruel" to companies, which are already suffering from so-called "demand destruction": consumers spending more on fuel and less on other goods and services.

In this context, Braga argues that the Brazilian Central Bank, as its exclusive mandate is to control inflation, unlike other central banks that also respond for unemployment and growth, tends to be more conservative. If there were a double target, the case for a significant drop in interest rates would be even more emphatic. Still, the assessment is that the thesis of reducing interest rates remains valid and will be "very positive for the Stock Exchange", although it has been postponed given the current scenario.

Café com Investidor
The Café com Investidor program is a NeoFeed production with CNN Brasil and is presented by Ralphe Manzoni Jr. Follow the new episodes, biweekly, at 7:45 pm, on CNN Money.

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Source: CNN