Brazilian markets soar on signs of slower inflation

Brazilian stocks jolted higher on Tuesday after fresh data showed a moderation in inflation, bolstering investors’ expectations that the Central Bank may soon cut the country’s benchmark interest rate — currently set at 13.75 percent.

Ibovespa, the country’s main stock index, soared 4.2 percent at 3:20 pm (Brazilian time) — on pace to posting its best one-day performance since October of last year. The Brazilian market on Tuesday vastly outperformed indicators such as the S&P 500 or Nasdaq. 

Brazil’s consumer price index, the IPCA, on Tuesday showed that prices rose slower in March than economists had forecast, providing a tailwind for financial markets that had been bruised earlier this year. Up until Monday, the Ibovespa index had plummeted by 7.9 percent. This was its second-worst performance for the first 100 days of a new presidency since Fernando Henrique Cardoso started his first term in 1995. 

“Inflation below market consensus allows the Brazilian Central Bank to start easing its monetary policy and boost riskier investments, especially stocks,” says Phil Soares, chief analyst at brokerage firm Órama.

March inflation sat at 0.71 percent — below the 0.84 percent February rate, which was the sharpest surge in 10 months, and under the median forecast of 0.77 percent measured by Reuters.

Many economists believe that the continuing slowdown of inflation has proven to be steady enough to allow the Central Bank to lower interest rates. A recent survey listed Brazil as the country with the world’s highest real interest rates (after discounting for inflation). 

In recent statements, the bank’s Monetary Policy Committee said it would only bring the rate down after “the disinflationary process consolidates and inflation expectations anchor around its targets.” A weekly Central Bank survey of top-rated market agents shows that investors still believe prices are set to shoot up in the near future. The median year-end inflation forecast sits at 5.98 percent — well above the 4.75 percent upper limit of the Central Bank’s target band.

For the government, the medicine against inflation is worse than the disease. Since taking office on January 1, President Luiz Inácio Lula da Silva and his allies have engaged in a very public feud with the monetary authority — once calling rate levels “shameful.” During a ceremony to celebrate the 100-day mark of his administration, Lula suggested the Central Bank is “toying with the country.”

Mr. Soares explains that lower interest rates heat up the economy, especially sectors linked to domestic demand, such as retail and education, in addition to lowering the cost of credit — as many borrowing costs are pegged to the IPCA index.

Last week, Lula hinted that the government could try upping its inflation target — a move that central banker Roberto Campos Neto has already publicly condemned. He said it would erode trust in the country’s economic indicators.

In its latest report on the global economic outlook, the International Monetary Fund advised markets to refrain from lowering rates at this point. Such moves would have a negative effect at this moment, leading to greater risks of bank and corporate insolvency.

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