Brazil swap rates on Thursday fully discounted a quarter-point cut from the key rate in June and a probability of the 50% that such a reduction occurs in May.
Traders now see an easing cycle totaling about 200 basis points by mid-2024. Just nine days ago they expected a 165 basis point cycle starting as recently as August.
ALSO READ: Tycoons behind American stores before possible investigation by Congress
“The market seems to believe that local activity is going to deteriorate significantly faster than previously thought”says Cássio Xavier, fund manager at Sicredi Asset Management. “The credit scenario is more complex.”
The collapse of retailer Americanas SA, he added, suggests a difficult reality for companies that need to roll over debt at higher rates just as banks are becoming increasingly cautious about expanding their credit portfolios.
The rapid change in market bets comes as President Luiz Inácio Lula da Silva pressures the central bank to start lowering borrowing costs, seeing them as an impediment to growth.
ALSO READ: Collapse of Americanas pauses several bond sales in Brazil
In an attempt to help politicians launch an easing campaign, Finance Minister Fernando Haddad is rushing through a proposal for a new fiscal rule that could allay investor fears about excessive government spending.
Economists polled by the central bank continue to expect the first rate cut in November, as they focus on a recent rise in inflation expectations, fueled by such fiscal concerns and the possibility of higher inflation targets, as Lula has suggested. .
Bruno Carvalho, a fixed-income manager at hedge fund Asset 1, said the central bank may be forced to start cutting rates even if inflation expectations deteriorate because the credit and economic situation could become a bigger problem.
“We can see the central bank react even without seeing, in its model, that inflation converges to the 2024 target”said Carvalho, adding that there is a consensus among analysts that monetary policy is “extremely tight” for now.
ALSO READ: Economic weakness puts Lula’s “barbecue and beer” at risk
