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BC had been persuading analysts with its forward guidance

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Vincent

We don't know yet how much damage Brazil's fiscal deterioration will have on expectations, but up until the end of September the Central Bank (BC) had been convincing economic analysts of a scenario where interest rates remain at 2% a year for a long time, as indicated by the monetary policy committee's "forward guidance."

The distribution map of market expectations released this morning by the BC shows that around 42% of economic analysts believe that interest rates will stay at 2% a year until the end of next year, or will be cut to a smaller percentage.

A month earlier, at the end of August, about 35% of analysts believed in these possibilities. On the last business day of July, less than 30% of economic analysts envisioned a scenario where interest rates would stay low for so long.

The median of financial market estimates still points to an increase in interest rates in 2021, to 2.5% per year. Nevertheless, the median decreased from the 3% a year that was being projected in late July and August.

This survey, however, was carried out on September 30, and so came before the president of the Central Bank, Roberto Campos Neto, threatened to withdraw the bank's forward guidance on interest rates if the spending cap was violated or if the government adopted some form of creative accounting to create room to pay for its Renda Cidadã cash-transfer program.

Economic analysts' views and the prices of assets traded in financial markets have diverged. The one-day DI contract in January 2022 rose to nearly 3.5% a year in the past few days, pricing in a stronger cycle of monetary tightening.

There is a difference, however, between the information that can be extracted from analysts' projections and from market prices. In their forecasts, analysts provide the scenarios that they consider most likely for interest rates. DI contracts, on the other hand, price the...

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