Multinationals should expect continuity from a monetary policy standpoint, as limited interest rate cuts are expected for this year, but higher-for-longer interest rates will persist in 2024
For now, multinationals should anticipate a limited impact from the board nominations on the monetary policy actions of Brazil’s central bank. With ongoing concerns regarding the persistence of Brazil’s core inflation, it is unlikely that the central bank will pursue aggressive cuts to the Selic rate this year, and there is still a strong possibility that no cuts will be implemented in 2023. As a result, high lending rates and a slowdown in economic activity may pose challenges not only to demand, but also to the financial stability of heavily leveraged firms. Multinationals should consider factoring in increased default rates and days sales outstanding (DSOs) from commercial partners in their 2023 and 2024 projections. However, it is worth noting that a higher-for-longer interest rate environment will continue to serve as a favorable factor bolstering Brazil’s currency.
Overview
On May 8, Gabriel Galípolo, deputy to Brazil’s Ministry of Finance, was appointed as the central bank’s new monetary policy director, filling in the vacancy left by the end of Bruno Serra Fernandes’s term in March. In his new role, Galípolo will be responsible for executing monetary and exchange policy instruments. The appointment coincides with brewing tensions between President Luis Inácio Lula da Silva and the central bank’s leadership regarding the direction of Brazil’s monetary policy. Seen as an economist with connections across the ideological spectrum, Galípolo’s nomination can be seen as a strategic move by the government to exert additional pressures on the central bank to begin interest rate cuts. Additionally, Ailton de Aquino Santos has been appointed as the new auditing director of the board. Alongside participating in the country’s monetary policy committee (Copom), this role primarily emphasizes safeguarding the liquidity and solvency of financial institutions, rather than directly implementing the institution’s monetary policy. Both nominees will require Senate approval, with the hearings expected to take place in mid-June. If approved, both Galípolo and Aquino Santos will assume their respective role for four years.
Our View
Galípolo’s and Aquino Santos’s appointments are expected to face little resistance in the Senate, virtually guaranteeing their confirmation. In the near term, Galípolo’s presence may introduce more dissension in the Monetary Policy Committee’s communication. So far, decisions regarding the country’s benchmark interest rate have been largely unanimous. However, with Galípolo on board, it wouldn’t be surprising to see some split decisions within the Copom as different views emerge on Brazil’s appropriate monetary policy stance. Nevertheless, it is important to note that Galípolo alone cannot single-handedly change the central bank’s policy direction. Policy decisions require a majority vote from the nine-person board. Therefore, the recent changes in the board’s composition will have limited impact on the implementation of Brazil’s monetary policy. While Galípolo’s appointment may not bring significant immediate changes, it could be viewed as an indicator of potentially more significant shifts in the central bank’s approach in the future. A greater risk premium lies when the term of Roberto Campos Neto, the current president of the institution, concludes in late 2024. If Brazil pursues more heterodox monetary policies, it could exacerbate existing inflationary pressures, increase exchange rate volatility, and pose fiscal risks.
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