The Central Bank is worried about the Brazilian real depreciation more than the inflation itself. In its last report, it acknowledges that the inflation has been driven by the weak BRL, and it lowered the end-of-year inflation forecast to 5.8% from the previous 6.0%.
That inflation forecast was before the US government shut down, which may delay the Fed tapering and possibly maintain some level of strength in the US dollar. However, tapering may reduce the fund inflows into Brazil, so there’s really no upside for the Brazilian real.
Whatever is motivating the Central Bank’s forecast, the report points towards additional hikes in the next Copom (Monetary Policy Committee) meeting. The Selic rate is at 9%, but 25 to 50 basis points is likely within the next week. Hopefully, by the time the end-of-November meeting comes around, additional macroeconomic data will have swayed the Central Bank’s opinion the other way.
In the short term, the Central Bank will focus on fighting depreciation. While this may help to reduce the cost of imports and boost some manufacturers, it’s more likely to further hurt the overall GDP growth.
A hike in the next Copom meeting wouldn’t be well received by the market, and it’s more likely that the short-term market drop will outweigh any appreciation of the Brazilian real.
We’ve seen that the short-term downside risks currently outweigh the upside in the Brazilian market (EWZ). Short-term investors are better off sitting this one out. Longer-term investors may be better off delaying a market entry and waiting for the market to drop further.
© 2013 Market Realist, Inc.