Brazil’s central bank lifted the key interest rate by 150 basis points late on Wednesday to combat surging inflation, more than the hike of 100 basis points expected in a Reuters poll.
Even as analysts warned that the aggressive pace of rate hikes in Brazil could choke economic growth, bets for a larger rate raise had been rising as fears of a fiscal spending breach fed into inflation concerns.
“One hundred and fifty basis points is simply seen as the minimum for a hike, so traders seem disappointed,” said Juan Perez, a senior currency trader at Monex Consulting, adding that it felt like the central bank came up short of a more hawkish stance.
But the real’s decline should be temporary, he said, as overall trade was coming back and as concerns over COVID-19 lessen. Citi strategists agreed: “Even though the market priced in the odds of a more aggressive hike, the 150bps is not necessarily a trigger for downside price action per se.”
Brazil’s economic outlook was also expected to deteriorate, according to a Reuters poll, with some risks of recession on the horizon as Latin America’s largest economy holds general elections next year.
Sao Paulo’s Bovespa stock index was flat, as a nearly 10% surge in Ambev on strong third-quarter results was offset by losses in oil and mining stocks as commodity prices slid.
Shares in Vale fell further after it said the U.S. Securities and Exchange Commission is expected to open a probe against the miner regarding the collapse of the Brumadinho dam, which killed 270 people in 2019.
Sentiment, more broadly, was also hit by signs of rising tensions between the United States and China after Beijing made a formal complaint to Washington about the U.S. revoking authorization of China Telecom’s license.
Mexico’s peso dropped 0.4% after Petroleos Mexicanos posted a loss in the third quarter. Concerns over the state-run oil and gas firm’s large dollar-denominated debt have dented sentiment towards Mexico.
Peru’s sol fell 0.3% as the country’s leftist government asked Congress for authorization to overhaul the world’s second-biggest copper producer’s tax code with a focus on raising taxes on the mining sector. Fears of such a move caused markets to tank when President Pedro Castillo took the lead in elections earlier this year. He assumed office in July.
The People’s Bank of China injected a net 100 billion yuan ($15.5 billion) into the financial system on Monday, adding to the net 320 billion yuan last week, the most since January.
