Tight US election clouds scenario for Brazil’s next interest rate decision
2024.10.24 07:47
By Fabricio de Castro
SAO PAULO (Reuters) – Policymakers at Brazil’s central bank will head into their November interest rate-setting meeting with an additional and unpredictable concern that goes way beyond local inflation figures: the U.S. presidential election.
As the prospects of a potential Donald Trump win help weaken Brazil’s real against the U.S. dollar, the central bank’s nine-person board will likely have few clues about the election outcome when they vote on the country’s interest rate.
U.S. Election Day is Nov. 5, with polls showing the race between Trump and Vice President Kamala Harris essentially tied, and the final results may not be known for days.
The monetary authority in Latin America’s largest economy holds its next rate-setting meeting on Nov. 5-6 and will announce its decision late on Nov. 6, a day before the U.S. Federal Reserve sets its own borrowing costs.
“The committee won’t have cues coming from the Fed decision and the election, which may force it to be more incisive in conducting monetary policy,” BGC Liquidez chief strategist Daniel Cunha said.
“There is a very reasonable possibility that they’ll have to discuss a 75-basis-point hike,” Cunha said.
Brazil’s central bank kicked off a monetary tightening cycle in September, when it raised its benchmark Selic rate by 25 basis points to 10.75% to tackle a challenging inflation outlook driven by stronger-than-expected economic activity.
It is now widely expected to accelerate its tightening pace next month, with the local interest rate curve pricing in a 90% chance of a 50 bps hike to 11.25%. The remaining 10% are pointing to a 75 bps increase.
The possibility of Republican former President Trump beating Democrat Harris in the Nov. 5 vote and returning to office next year has taken its toll on Brazil’s financial markets.
The Brazilian real weakened from 5.44 per dollar in late September to 5.73 per greenback this week, with market participants citing both local fiscal concerns and Trump’s victory chances as reasons behind the drop.
The effects of the real’s depreciation on Brazil’s inflation is one of the factors the central bank will closely monitor ahead of its November meeting.
“We have seen the foreign exchange rate more pressured whenever the possibility of a Trump win seems more prominent, much of it because of his proposed import surcharges,” StoneX market intelligence analyst Leonel Mattos said.
Trump has said he would impose tariffs of 10% or 20% on all imports and 60% or more on Chinese imports, a plan Harris has described as a tax on U.S. consumers.
“That is negative for Brazilian exports as the U.S. is the country’s second-largest trading partner,” Mattson said. “If it exports less to the U.S., Brazil will also get fewer dollars, which tends to weaken the real.”
