Brazil’s Real Rally May Offset Commodities Impact on Inflation
Brazil’s Real Rally May Offset Commodities Impact on Inflation
(Bloomberg) -- The Brazilian real’s world-beating rally may partially offset the impact of higher commodity prices on inflation, leaving policy makers in a more comfortable position to put an end to a yearlong monetary tightening cycle.
The dollar-based Bloomberg commodity index jumped 30% this year, but it’s only up 13% in Brazilian real terms as the local currency rallied more than 16% in that span. The real is the best performer among major currencies this year as investors are lured by cheap stock valuations and high interest rates on fixed-income securities.
Central bank director Fernanda Guardado highlighted the benefit of the stronger foreign-exchange rate to local prices in a presentation that followed the bank’s quarterly inflation report on Thursday. At the same event, central bank chief Roberto Campos Neto said that while interest rates can be lifted by another 100 basis points in May, an additional increase in June is not the most likely outcome.
Brazil’s swap rates dropped after Campos Neto’s remarks as traders reduced the premium in the curve to cover for the risk the central bank was forced to raise rates further than May.
“The benign impact of the currency on inflation could take time, but it may hit the price of many products,” helping the central bank control inflation with fewer rates increases, said Gustavo Brotto, the chief investment officer at Greenbay Investimentos. He expects just one more 100-basis points rate hike at the next meeting.
©2022 Bloomberg L.P.