Brazil's market rout after Lula's reelection has clouded the outlook for cheaper credit. The central bank meets this week and must weigh inflation risks against high borrowing costs, while investors question how far Lula will tighten fiscal policy.
Brazil's market rout following Lula's reelection has put the path to cheaper credit in doubt. The country's central bank now has to weigh inflation risks against painfully high borrowing costs.
Policymakers begin a two-day meeting on Tuesday, with Wednesday's decision serving as an early test of the rate outlook. The committee has cut rates by 25 basis points at each of its last five meetings. A Reuters poll found 33 of 48 economists expected a hold at 13.75%, with median forecasts keeping rates there until the second quarter of 2027.
Real and Bovespa slide as Lula's win upends bets
Last week, the real lost 8.5% against the US dollar and the Bovespa stock index shed about 18%. Lula's victory overturned bets on a win for right-wing challenger Flavio Bolsonaro. Those bets had fueled a rally after Bolsonaro unexpectedly led the first round, reflecting hopes for tighter public finances.
Investors must now gauge how far Lula is willing and able to tighten fiscal policy. Petar Atanasov of Gramercy Funds Management still sees room for fiscal adjustment under Lula, but expects it to be slower than investors had anticipated under Bolsonaro.
Inflation and debt pressures build
Prices in Latin America's largest economy rose 4.62% in the year through mid-October. Government interest payments reached 9% of GDP in the year through September, the highest share since January 2016. Household debt hit a record 50.1% of annual income, and repayments consumed a record 29%, central bank data showed last week.
A weaker real raises import costs, which could feed into consumer inflation. Liam Peach of Capital Economics estimates the depreciation could add 0.3 percentage point to headline inflation over six months, and expects rate cuts to pause rather than reverse.
Carlos Carranza of M&G Investments sees inflation as contained and fiscal uncertainty as the bigger obstacle. According to Capital Economics' Peach: "The bigger concern is the sharp rise in bond yields", which he said could tighten financing conditions if sustained.
Source: Investing.com
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