The Fed (Federal Reserve, central bank of the United States) raised this Wednesday (15/6) the interest of the American economy by 0.75 percentage point, to the range of 1.5% to 1.75%.
It was the biggest increase since 1994, in an attempt to contain inflation in the US, pressured by the increase in fuel and food prices, as a result of the war in Ukraine and the logistical disruptions caused by the lockdowns in response to covid-19 in China.
After the rate hike, Fed Chair Jerome Powell signaled the next high should be 0.50 or 0.75 percentage point, allaying fears that the next adjustment could be even stronger, 1 point.
“Clearly, the 75 basis point increase [0,75 ponto percentual] today is unusually large and I don’t expect moves of that size to be common,” Powell said. “From today’s perspective, a 50 basis point or 75 basis point increase seems more likely at our next meeting.”
As a result, the dollar began to fall against the real, given the relief of investors, who believed that the monetary adjustment in the US could be even tougher.
This Wednesday (15/06), the Monetary Policy Committee (Copom) of the Brazilian Central Bank unanimously raised the basic interest rate in the country by 0.5 percentage point. With that, the Selic increased to 13.25% per year.
The rise in interest rates in the United States and other developed countries points to a slowdown in the world economy ahead.
That’s because, when interest rates rise, it becomes more expensive for companies and families to borrow, which slows down economic activity. In addition, investors take resources from developing countries towards rich countries, which are considered safer.
For Brazil, this should have two main effects: on the one hand, the slowdown in the world economy reduces demand for goods and services, and it can reduce Brazilian exports.
On the other hand, the reduction in global activity could help contain inflation in Brazil, at a time when expectations for prices worsen in the face of pressure on public accounts with measures adopted by President Jair Bolsonaro (PL) in an election year.
As to what will become of the dollar, economists are divided.
There are those who bet that the American currency will end the year above R$ 5, as the high interest rates in the US cause resources to leave Brazil towards US Treasury papers.
But there are also those who believe that there is room for the dollar below R$5, given the milder announcement by Powell about the direction of US monetary policy.
Who thinks the dollar will stay above R$5
“Looking ahead, in a scenario in which the Fed will continue to raise interest rates and there is a lot of uncertainty about the end point of this increase – I believe it will be closer to 3.5% to 4% – we will see repercussions on the exchange rate”, says Sergio Vale, chief economist at MB Associados.
“To make our situation worse, we have a complicated fiscal cycle in the Brazilian economy and a very tense political-electoral cycle for the second half of the year. Putting these three elements together, we have reached the exchange rate above R$5 that we expect at the end of the year.”
Vale projects the dollar at R$ 5.30 at the end of 2022. The American currency reached close to R$ 4.60 in mid-April, given the strong appreciation of commodities amid the war in Ukraine, which attracted foreign resources to Brazil .
The appreciation of the real lost strength, however, in the face of negative signs for world inflation and decisions by the federal government, such as the package to reduce fuel taxes, understood by the market as having a high potential impact on public accounts. As a result, the dollar returned in recent days to a level above R$5.
“When the Fed raises interest rates, there is an inflow of capital into the United States to benefit from these higher interest rates”, explains Vale. “As much as interest rates there are much lower than here, it is a much more reliable country. Thus, high interest rates lead to an outflow of resources from emerging countries to the American market.”
The economist at MB Associados explains that the great fear with the rise in interest rates in the US is that the US economy is heading towards a recession, which would slow down the rest of the world, including Brazil, through the export channel.
And who doesn’t see the dollar above R$5
On the other hand, Flavio Serrano, chief economist at Greenbay Investimentos, does not believe in the dollar above R$5 at the end of this year.
“Powell’s speech was a little more reassuring, despite Wednesday’s 0.75 rally, because it took the ghost off a 100-point high. [1 ponto percentual] in the short term”, says Serrano. “With that, the American stock market went up and the currencies in general started to perform very well against the American dollar, here it was no different.”
Serrano sees the dollar between R$4.80 and R$5 at the end of 2022.
“There is a potential for lower global growth, generating less pressure on prices. This may facilitate the work of the Brazilian Central Bank in combating inflation.”
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