Market erases guess on Selic excessive in September

The yield curve now prices only around five basis points higher in the Selic next month.

The interest rate futures market erased most bets on a further rise in the Selic In September. The movement gained momentum with the milder inflation in the United States this Wednesday, following the deflation in Brazil and the signal in the minutes of the Copom meeting that the Selic rate may remain stable from now on.

THE yield curve prices now only around five basis points higher in the Selic rate next month, which suggests a greater chance of interest rate maintenance at the current 13.75%, defined by last week’s Copom. As of Friday, the market was still pricing in a residual rise of another 0.25 percentage point next month. Options traded on B3 closed yesterday with a 68% probability that the Selic will not rise further.

THE inflation was flat in July in the US, month-on-month, better than the 0.2% high estimate. In Brazil, the IPCA showed a deflation of 0.68% in July, the highest in history. When releasing the minutes of the Copom meeting yesterday, the Central Bank stated that it will assess whether only the prospect of maintaining interest rates “for a sufficiently long period” will ensure the convergence of inflation to the target. The phrase was interpreted as a sign that the cycle of monetary tightening has already ended.

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The dollar accumulates a fall of more than 4% in the last five days, which could mean more relief for inflation. “I believe that the real rally takes pressure from the Central Bank to raise interest rates again. The incentive for another 0.25pp rise in September may not be as strong now,” said Brendan McKenna, strategist at Wells Fargo.

Despite the drop in inflation in July, which mainly reflects the tax cut made by the government, analysts remain cautious regarding expectations for inflation in 2023. In a questionnaire sent by the Central Bank to economists before the Copom and published after the minutes, 54% responded that they see upside risk for inflation in the coming year and 93% said the fiscal outlook has worsened.

Source: Bloomberg