November 29, 2022

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Tom Nicholson/Reuters - 31/10/2021

England is the first rich country to raise interest rates to contain inflation. Understanding the impact on Brazil – the economy

Bank England (BoE, its English acronym) was launched on Thursday, 16th, a movement that could reach other central banks in rich countries and have a direct impact on emerging countries, such as Brazil. K inflation At very high levels by local standards, today at around 5% per year, the Bank of England has announced an increase in its base rate of Outlay From 0.10% to 0.25% per annum.

It may not sound like much, but the sign is unmistakable. Inflation is a concern and some brake on economic activity will be necessary to return to the 2% target. on wednesday 15, Federal Reserve (Fed, Central Bank of United State) has already given an indication in this direction, pointing to at least three interest rate increases in 2022.

I s European Central Bank (European Central Bank) decided, on Thursday, to keep the interest rate unchanged at -0.5%. But it also announced the start of reducing the pace of asset purchases from the next quarter, ending by March 2022 the emergency program to stimulate the economy that was created last year to limit the effects of the Covid-19 pandemic.

More attractive interest rates in developed countries mean that emerging countries will have more difficulty attracting money from investors, who will always prefer the greater security offered by countries with more stable economies. As a result, emerging countries need to raise their rates more to become more competitive. But high interest rates threaten internal performance: the cost of investments increases, Public debt It rises, and the tendency of the economy to decline.

Influences other than Brazil

For Thiago Periel, chief strategist at BTG Pactual Asset Management and former director of international affairs at the central bank, Brazil is in a slightly better position than other emerging countries because it has been aggressively adjusting rates in recent months. The fact that Brazil relies less on the international market and on foreign investors to fund government accounts is also significant.

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However, the country will not be immune to high interest rates in developed countries and eventually generalized capital inflows. “When malaise appears among the youngsters, it usually affects everyone, even the most protected. We saw this, for example, in 2018,” he adds.

“In 2018, the Federal Reserve started raising interest rates. We saw volatility, a depreciation movement, and the need to raise interest rates in many emerging countries. We saw that in Turkey, South Africa, and Brazil. There is a pattern in that coinciding with or It appears to be causing greater volatility in emerging countries.”

The scenario of higher interest rates in rich countries makes Brazil, in theory, less attractive to international investors, says Braulio Langer, investment analyst at brokerage Toro, causing the dollar to rise and the stock market to weaken. However, he remembers that shares of Brazilian companies have underperformed in recent months and that this may also attract foreign capital.

“What we have to consider are the external and internal factors that will most affect investment here in the country. We have already started after several weeks of downturn. So, our stock exchange may do better, depending on how it unfolds. The electoral scenario. There are other factors to the electoral scenario. The side of this interest rate issue could affect the stock market here. It’s hard to know which one will have more weight,” says Langer.

In the view of Bruno Hampshire, international economist at ACE, the Brazilian economy could suffer if, eventually, the Federal Reserve raises interest rates beyond the level the market expects, which is 1.5% annually. In this case, there may be a stronger slowdown in economic activity in the United States, which could also indirectly harm the Brazilian economy. However, this is not the most likely scenario.

“The Fed should start raising rates in April and May, and if something is done gradually and orderly, it will take time (to slow down activity in the United States). Today the American economy is in good health. Structurally, it has the potential to grow for a long time, he says. “For the Federal Reserve to come in and kill the recovery of the US economy, that will be a story for 2023. I don’t think that will be soon next year.”

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The effect of omicrons on the economy

In the case of England, the decision to raise interest rates takes into account higher prices. BoE analysts expect inflation to remain at around 5% through most of the British winter, peaking at 6% in April 2022. But projects will slow in the second half of next year.

Although some analysts suggested the possibility of raising interest rates, the market as a whole expected the base rate to be maintained at 0.1%, due to the strong influence of the omicron variable, from Corona Virus, number United kingdom. The state again tightened restrictions on movement and registered case records.

The company’s specialist team cut growth expectations gross domestic product From 1% to 0.5% in the fourth quarter compared to the previous quarter, indicating the emergence of the omicron variant of the Corona virus. In the BoE’s view, pressure should affect activity in the short term, but the impact on inflation remains uncertain.

The European Central Bank believes it is unlikely to raise interest rates in 2022

The European Central Bank chose a more cautious path. Bank President Christine Lagarde said Thursday that BC is unlikely to raise interest rates in 2022, and that not everything that will happen at the Fed will be repeated by the European Central Bank. According to her, the maintenance of rates is essential to ensure the stability of inflation. Lagarde highlighted that the ECB expects inflation to reach the target in the medium term, and that they will strive to do so.

During a speech after the decision, he said, “There is still a need for monetary adjustment so that inflation stabilizes at our target for inflation of 2% over the medium term. Given the current uncertainty, we need to maintain flexibility and discretion in managing monetary policy.” European Central Bank monetary policy.

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Regarding the current scenario, the president clarified that there are doubts about the omicron and the fifth wave of covid-19 cases in Europe. “Some eurozone countries have reintroduced stricter containment measures. This may delay the recovery, especially in travel, tourism, hospitality and leisure,” he said.

Turkish BC cuts base rate despite inflation

Contrary to global concerns, the Turkish Central Bank announced, on Thursday, a cut in the base interest rate by one percentage point, from 15% to 14%, despite the continuous escalation of inflation in the country. The decision reinforces the lack of confidence in the financial markets from political pressures from Turkish President Recep Tayyip Erdogan on the locality of BC. In recent weeks, he has reiterated his opposition to tightening interest rate policy, calling for unconventional policies to curb inflation.

In a statement, the Turkish Center explained that the interest rate cut reflects the transient nature of price acceleration, which would be driven by factors “out of monetary control.” The institution added that the cumulative impact of recent decisions will be monitored throughout the first quarter of 2022, when it intends to assess “all aspects of the policy framework in order to create a basis for sustainable price stability.”

The bank also confirmed that it will “firmly” use all the tools at its disposal until inflation returns to the medium-term target of 5%. Thursday’s decision is a continuation of the rate-cutting cycle that began in November, when the base rate was cut from 18% to 15%. To ensure intervention in the BC, President Erdoğan changed the leadership of the Monetary Authority and dismissed the members of the commission.