(Bloomberg) — Traders dubbed Brazil’s central bank hawkish turn “a shock and awe” move that would lift the nation’s battered assets. A day later, the market is signaling it’s not enough.
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The Brazilian real weakened as much as 0.8%, the worst performance in a basket of major emerging-market currencies tracked by Bloomberg. The move, which wiped out an earlier gain of 1.6%, came after policymakers on Wednesday delivered a 100 basis point interest rate hike and pledged two more increases of the same magnitude by March in a bid to stem a recent rout.
The central bank’s hawkish turn in which policymakers pledged to take the benchmark Selic to 14.25% in the coming months should have offered support to the battered currency, traders say. But Brazil’s swelling budget deficit continues to weigh on markets, pushing longer dated swap rates up even as after policymakers’ commitment to bringing inflation expectations back on track.
Swaps rose across the curve Thursday, with long-end maturities rising more than 30 basis points. The nation’s benchmark Ibovespa stock index, meanwhile, fell more than 2%.
“Clearly the central bank’s move wasn’t enough,” Solange Srour, head of Brazil macroeconomics at UBS Global Wealth Management. “The monetary authority can’t solve the problem alone, even by hiking rates.”
In the statement accompanying the decision — the last chaired by Governor Roberto Campos Neto, who’s set to be replaced by Gabriel Galipolo — policymakers emphasized that the government’s recently announced fiscal package “significantly impacted asset prices and expectations, especially the risk premium, inflation expectations and the exchange rate.”
Mauricio Bernardo, rates manager at Vinland Capital, said the central bank’s move was a “firm response” to worsening expectations and leaves the scenario less uncertain for when Galipolo comes in next year.
Traders are also closely monitoring the health of President Luiz Inacio Lula da Silva, who underwent another surgery Thursday morning. The procedure was successful and Lula should be discharged from the hospital at the beginning of next week, his doctor told journalists at the hospital in Sao Paulo.
On Thursday, Communications Minister Paulo Pimenta said Lula will run for reelection in 2026, a decision that could further weigh on assets.
