Top Brazil Fund Managers Predict Rates to Plunge Under Temer

  • A new economic team needs to act fast to restore confidence
  • BCB expected to quickly cut Selic to 12.25% under team-Temer

Brazil’s central bank will have room to swiftly cut interest rates to boost business confidence under a new government without risking a pickup in consumer prices, said three of the country’s top independent fund managers.

The benchmark Selic rate, which the central bank kept at a near-decade high of 14.25 percent on Wednesday, could quickly fall to 12.25 percent if Vice President Michel Temer takes over with a market-friendly cabinet, the fund managers said late on Wednesday at a panel organized by Bloomberg in Rio de Janeiro.

“Two hundred basis points is the least interest rates should fall,” said former central bank director Beny Parnes, currently a partner at asset manager Spx Gestao de Recursos. “This would be a great advantage for the next government.”

President Dilma Rousseff is facing impeachment and could be forced to temporarily step aside by mid-May if a simple majority of senators votes that she should stand trial. Temer would take her place, and become president if she is impeached by a two-thirds majority in the Senate. Her former ally is expected to pick a fresh economic team if he gets her job, including a new head of the central bank.

Investors currently bet the central bank will cut interest rates by as much as 125 basis points by the end of the year, according to data compiled by Bloomberg.

Past Mistakes

Parnes said the central bank led by Alexandre Tombini is “paying the price for its past mistakes” as it attempts to regain credibility after repeatedly failing to bring inflation down to its 4.5 percent target. A central bank spokesman declined to comment.

Brazil’s consumer inflation was 9.39 percent in March, though it has slowed in the last two months. In 2015, it ended at double digits for the first time in 13 years even as the economy headed toward a second consecutive year of recession -- the deepest in over a century. Temer’s PMDB party has unveiled a market-friendly program of economic reforms that has fueled optimism among investors, driving a 26 percent rally in the Ibovespa stock index so far this year.

A 200 basis-point-cut in the Selic could quickly be implemented by the new government but anything beyond that would require “some progress” on the fiscal side, said Fernando Rocha, partner at JGP Gestao de Recursos.

“A new economic team with credibility will find some fat in interest rates that it will be able to cut,” he said. 

Paulo Bilyk, chief investment officer at Rio Bravo Investimentos, said Temer’s team is fully aware it needs to act fast to foster business and market confidence. “They know they don’t have 100 days, they have only 60 days to do something,” he said, referring to Brazil’s municipal elections scheduled for October.

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