“You can’t say that the BC’s monetary policy was a success”, says former BC director
In October 2020, Tony Volpon assumed the post of chief strategist at Wealth High Governance (WHG), a company newly formed, at the time, by former executives of Credit Suisse, in partnership with XP, which holds a 49 .9% in the operation.
The economist brought a long list of “services rendered” as credentials for the position. For the previous four years, he had served as chief economist at UBS Brasil. Previously, between April 2015 and July 2016, he was Director of International Affairs at the Central Bank. His resume also included stints at institutions such as Bank of America and Nomura Securities.
Two years later, WHG gained momentum and has more than R$20 billion under management, exceeding the volume projected at the beginning of operations. Highly regarded in the market, Volpon helped the house achieve this goal. And now, it’s focused on other indicators. In particular, in the global inflationary scenario, focus of the action of the largest central banks in the world, among them, the Federal Reserve (Fed), the American Central Bank.
Faced with the policies being adopted by the Fed, which have implications for all economies, Volpon considers that the American yield curve prices a large and rapid deflation in the United States, which tends to happen with any recession that the stock market does not price.
“The stock market signals a very soft landing for the economy. But given the level of inertial inflation, especially in the US job market, it is difficult to imagine that there will be significant disinflation without some recession,” he says, in an interview with NeoFeed. “And maybe the Fed will have to pay more interest or do what the Brazilian central bank seems inclined to do: keep interest rates high for longer.”
Volpon assesses that the cycle of monetary tightening in Brazil should be interrupted by Copom on Wednesday, August 3rd. “The relief that came from the Fed creates the perfect window for our BC to stop raising the Selic rate”, he comments.
He recognizes that the country has gone through important shocks since the pandemic, but says that it is not possible to say that the BC’s monetary policy was a success.
“Can’t say with BC writing two letters in a row and maybe a third in 2023 [para explicar ao ministro da Economia porque a inflação não ficou na meta]. Inflation already appeared to be an issue at the end of 2020, but we have gone through at least four or five revisions of the BC’s monetary policy and strategy flight plan,” he says.
Follow the main parts of the interview to the NeoFeed:
What is WHG’s vision for the US economy?
We are going through an inflection point in the global inflationary scenario. Crude oil hit its high on June 8 and fell. We have seen a similar process with other commodities. Other indices that try to measure supply restrictions have also improved. In the last month and a half, several inflation indicators began to point to a slowdown. Combined with this we had an apparently tougher decision from the Federal Reserve (Fed), the US Central Bank [com aumento do juro em de 0,75 ponto], but various weightings by Jerome Powell indicated a more flexible Fed. And the interest rate closer to neutral could allow the institution, within the mandate it pursues, to look not only at inflation, but also at activity.
Is the determining factor for the recession inflation?
It is inflation and the indications are that full inflation has already reached its peak. Assuming there will be no unexpected shocks, some ‘black swan’, the peak has passed. That’s the good news. The bad news is that core inflation will remain under considerable pressure. The yield curve is adjusting after the Fed’s decision to raise the rate to the 2.25%-2.50% range. The curve pointed to a rate [terminal] of 4%. After the decision, it is 3.25%, but the curve already points to a cut by the Fed in 2023 for interest rates below neutral.
Isn’t there an exaggeration in pricing?
The yield curve is indicating an extremely large and rapid deflation and it tends to occur with some recession that the stock market does not price. The stock market signals a very soft landing for the economy. I see a divided market with the stock market favoring a positive scenario. But given the level of inertial inflation, especially in the labor market, it is difficult to imagine that there will be significant disinflation without some recession. The yield curve is very optimistic.
“Assuming there will be no unexpected shocks, some ‘black swan’, the peak has passed. That’s the good news. The bad news is that core inflation will continue to be under pressure.”
Are there already signs of recession?
The real estate sector, in construction of new houses, is already in recession. The manufacturing sector is flirting with her. But to deflate the economy, you’ll need to get to the job market. It is not possible to resolve the issue of inflation only by looking at the most volatile determinants such as commodities or inventories. To hit inflation, you have to hit demand at the heart – the job market.
And Brazil? What are WHG’s expectations?
For this year’s GDP, we expect 2.2% and a drop of 0.5% in 2023. Our forecast for the IPCA is 7.3% for 2022 and 5.3% for next year. As for the Selic rate, we expect 13.75% this year and 12.50% next year. For the exchange rate, we project, respectively, R$ 5.20 and R$ 5.00.
Should the Copom interrupt the monetary tightening cycle at this meeting today?
We believe so, largely because of the relief that came from the Fed. If markets react to the Fed, so will central banks. When the exchange rate was at R$5.60 and the expectation was that the Fed would raise its rate by 1 percentage point, our assessment was that the Copom would not be able to stop raising the Selic rate. But, there are some meetings, the Copom would like to stop. The situation, however, was not allowing it. Now it’s the perfect window.
How do you evaluate the Central Bank’s policy?
It cannot be said that monetary policy was a success with the BC writing two letters in a row and perhaps a third in 2023 [para explicar ao ministro da Economia porque a inflação não ficou na meta]. It is also true that the country has experienced important exogenous shocks since the pandemic. But there were errors in the conduct of monetary policy that added to the problems. Inflation already seemed to be an issue at the end of 2020, when it closed well above the center of the target, but we went through at least four or five revisions of the BC’s monetary policy flight plan and it was not alone. The Fed, for example, stayed in that conversation [da inflação transitória] a good time. It cannot be said that the BC did a great job because it started to raise the rate first.
But raising the interest first than others count?
He started to go up first, but because he had cut interest more than anyone else.
Does the fact that Brazil has high interest rates give the country any advantage over international investors?
The interest rate differential does not seem to have been a major component of the exchange rate fluctuation, of the real. At the beginning of the year, we had an important flow of foreign capital to the stock exchange. Subsequently, we followed the fall in commodities that affected the dollar [no mundo] and has helped the real and the market’s perception of the fiscal issue. Interest seems to be a factor that absorbs negative shocks and prevents the exchange rate from going to R$6, but it is not my perception that interest is being a positive ‘driver’ for investors. Even because to make positions of carry trade [tomar recursos em mercados onde o juro é menor e aplicar onde o juro é maior e ganhar o diferencial] it is necessary to have some more positive vision and answers to some questions. Among them, has inflation already peaked in Brazil? Will the BC stop raising interest rates? What will be the result of the election?
Is there a roadmap to follow to apply in interest in Brazil?
there is an check list than you need to have to stay in interest. We can list three points for any investor, not just the international one, to have a good return: 1) Is the interest high? Because if the interest rate is too low, it is almost certain that you will lose money next year, staying in fixed income always watching inflation. 2) You can’t have a BC fighting you. He doesn’t have to cut interest, but he can’t go up. 3) It is necessary to pay attention to inflation because if there is a disinflation process in the world, this process will have an impact in Brazil. This week we should have a BC position and the check list if complete. It is true that we will still have an election. But after the election, there should be no more prize [na curva de juros].
“Despite several criticisms that I consider correct, due to several things that happened in the fiscal sphere, I still believe that Paulo Guedes and team played a lot in defense and avoided even worse things”
Do we have a similar moment in the interest rate market in the recent past?
We had an inflection point around March 2016, when the market knew that the Selic would not rise more than 14.25%, inflation began to subside in a more structural way, the impeachment of then President Dilma Rousseff was already planned in the horizon and there was expectation of a better definition of the fiscal issue due to the impeachment. A process of falling interest rates in the market began. The Copom cut interest rates later that year. In October. The fall in interest rates then lasted almost 18 months.
What does Brazil need to do to grow strong?
This is an extensive discussion. Soon, the demographic bonus is turning, Brazil also invests very little. We have surges of foreign capital following commodity cycles and, at this point, there is something positive because I believe that commodities will continue with high prices for many years to come. And commodities are very important for Brazil. The external vector will be very relevant in the coming years. And, being positive, it has a positive effect on financial assets and generates a more favorable flow of capital to the country.
What is your assessment of the work of the Ministry of Economy?
They did a lot of good things, even despised by the market, which pays close attention to the fiscal issue and the easing of the spending ceiling rule. It happened and it is undeniable. The economic team did sectorial things. But, even from my experience at the BC, I understand that the Minister of Finance or the Minister of Economy plays a lot in defense. Often there is no political context to do the best and try to avoid the worst. Despite several criticisms that I consider correct, due to several things that happened in the fiscal sphere, I still believe that Paulo Guedes and team played a lot in defense and avoided even worse things. I have a more positive view of the economic team.