US and Brazil set interest rates in the shadow of peace uncertainties in the Middle East

The central banks of Brazil and the United States announce their monetary policy decisions this Wednesday (17) at a time of unanchored inflation and geopolitical uncertainties.

The uncertainty scenario gained a new layer this week, after the US and Iranian governments affirmed a prior agreement to end the conflict in the Middle East and reopen the Strait of Hormuz, a fundamental channel for the supply of oil around the world.

Although the news signals relief to global investors, the lack of concrete information about the terms and viability of the practice still keeps a dose of caution in the air, and the news should not impact the results expected for the decisions of this Super Wednesday.

The majority market expectation is that the Copom (Monetary Policy Committee) of the BC (Central Bank) will reduce the Selic rate by 0.25 points, to 14.25% per year.

For the Fomc (Federal Open Market Committee) of the Fed (Federal Reserve), bets are on freezing the rate between 3.5% and 3.75%. If confirmed, it will be the fourth consecutive meeting with unchanged rates.

To CNN Money, experts point out that, more important than the decisions, will be the announcements from the monetary authorities and the signals about the next steps in interest rate policy.

In both countries, inflation remains above desired levels and geopolitical and fiscal uncertainties have hampered the process of reducing interest rates.

In Brazil, for example, the main question is whether the expected cut will mark the end of the current cycle of monetary easing.

The assessment of large financial institutions is that the space for further reductions is increasingly restricted.

In a report, XP Investimentos assessed that "the flow of data and economic news since the last Copom meeting indicates further deterioration in the inflation scenario" and said that the Committee should adopt a more cautious stance.

According to the institution, the combination of stronger economic activity, fiscal stimuli, exchange rate devaluation and higher inflation expectations increased the risks for inflation convergence to the target.

"We believe that recent economic data and news suggest additional caution in the conduct of monetary policy and may convince Copom members to pause the easing cycle soon", highlighted the XP report.

The institution projects that the Central Bank's inflation estimate for the end of 2027 will rise from 3.5% to 3.6%, remaining above the ongoing target of 3%.

In turn, Goldman Sachs also predicts a cut of 0.25 points, but sees relevant chances of maintaining the Selic. For the bank, the scenario remains challenging in the face of inflation.

"Although the preliminary real interest rate is still quite high, the room for maneuver for rate cuts is very limited," stated the report, which assigns a 40% probability to maintaining the Selic rate this Super Wednesday.

In an interview with CNN Money, Luiz Otávio Leal, chief economist at G5 Partners, stated that the external scenario became more favorable to a reduction in the basic interest rate after the relief of tensions in the Middle East.

By Lucinda Pinto: Market prices BC decision and monitors statement | MARKET CLOSURE

"Until last week, the market was very nervous and had removed any chance of a cut in the interest rate curve at this meeting. With the advent of this agreement, the scenario cleared up, the pressure on the interest curve improved and apparently it seems that the environment became more favorable for a 0.25% cut", he assessed.

Despite this, Leal highlighted that current inflation is above the target ceiling and long-term expectations are unanchored. According to the economist, credit stimulus programs and measures aimed at increasing demand reduce the space for cuts.

Fed holds interest rates
In the United States, the consensus is that the Fed will maintain interest rates, which is still facing difficulties in bringing inflation back to the 2% target.

"There is a broad consensus that the FOMC should not change interest rates tomorrow. In fact, the expectation is that, if the macroeconomic scenario is not significantly changed, we should not see changes in the Fed Funds (effective federal funds rate) for a long time", said Danilo Igliori, chief economist at Nomad.

In March, most Fed officials projected two interest rate cuts throughout this year. Now, investors are seeking to understand whether this scenario remains valid given uncertainties related to a peace agreement in the Middle East, which could change the outlook for energy prices.

"Given the current uncertainties, it will be essential to understand what authorities are thinking about the future dynamics of inflation and the balance of risks", concluded Igliori.

In relation to the United States, Leal highlighted that this week's Federal Reserve meeting will have two particularly relevant characteristics.

The first is that it is an end-of-quarter meeting, when Fed members release their projections for GDP, inflation, unemployment and interest rates.

In March, the majority expected two interest rate cuts throughout the year, but the new scenario raises doubts as to whether there will be cuts or even increases.

The second feature is that this will be the first meeting under Kevin Walsh's command, and also his first press conference after a decision.

"We will have to see in this post-meeting interview what Kevin Walsh's stance will be," said Leal, highlighting that Walsh demonstrated, in his hearing, different ideas both about the Fed's communication and about the inflation parameters adopted by the institution.

The expected result for the United States, according to the economist, is the maintenance of interest rates at the current level.

Source: CNN