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Analysis: For how long will Copom act independently of Fed?

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Vincent

For the first time since central banks started tackling the biggest inflation surge in 40 years, monetary tightening in Brazil was softer than in the United States. For how long will Brazil’s monetary policy be independent of that of the U.S. Federal Reserve?The Fed raised interest rates by 75 basis points on Wednesday, to the range between 1.5% and 1.75% a year. Here in Brazil, the Central Bank’s Monetary Policy Committee raised the Selic, the country’s benchmark interest rate, by 50 bp, to 13.25% a year.There are two ways to describe this situation. The more upbeat one is that the spread between Brazil’s and the U.S.’s interest rates is 11.5 percentage points, which somewhat cushions Brazil from potential setbacks in the Fed’s monetary tightening push.The less favorable description is that the spread between both countries’ interest rates is now narrower - it was 11.75 pp until Tuesday - and this gap is likely to close even more in the following months as the mismatch between both countries’ hikes will remain in place.The Fed indicated on Wednesday that it sees as possible a new 75 bp hike in its next meeting or a lower hike of 50 bp. The Brazilian policymakers indicated another 50 bp hike, or raising the rates slowly, by 25 bp.In the first hours after Fed’s decision, the markets showed some relief, as the stock markets rose and the real gained ground against the dollar. But not because good things will happen in the U.S. monetary policy. That happened because the worst-case scenario - which had been priced by the markets - seemed a little less probable to materialize.Then we are back to the big question mark: Will Brazil remain somewhat immune to the Fed, or at some point we will feel the blow and the Copom will be forced to push back raising the interest rates? In the past, when interest rates went up in the U.S., that caused risk aversion and capital flight in emergent countries.There are two, very popular views in the markets about it. One says that the Brazilian economy is more protected now. Any interest shock in the U.S. is transmitted through the interest rates, and the high prices of the commodities kind of protect Brazil, because they bring a substantial flow of hard currency to the country.Another group of analysts believes that it...

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