The domino effect that could ignite markets in the coming weeks

Guided by the central banks’ priority to fight inflation, the monetary policy meetings scheduled for the next three weeks will produce a domino effect with the potential to inflame markets even more. Starting this week.

The first piece moves on Thursday, July 21st. The European Central Bank (ECB) is expected to break its more than a decade fast and raise its rates by 0.25 percentage point.

The following week, on July 27, the Federal Reserve (Fed), the US central bank, may raise interest rates by 0.75 point. On August 3, the Monetary Policy Committee (Copom), of the Central Bank of Brazil, may adjust the Selic by 0.50 point, to 13.75%, and announce that it will stop there.

This roadmap was taken for granted until last week, but the winds have changed and there is uncertainty about the next steps of central banks because the slowdown in activity could come sooner abroad.

And, in Brazil, fiscal risks could worsen the outlook for inflation in 2023 and redouble the BC’s caution, despite the IPCA deceleration this year due to tax relief on fuel prices.

Next Thursday, the ECB shares the scene with Russia, which, on the same day 21 July, will decide whether or not to reopen the Nord Stream 1 gas pipeline that transports natural gas to Europe via Germany.

Nord Stream 1 went into maintenance 10 days ago and the resumption of activity is scheduled for this Thursday, warns the international press. If Russia decides to keep the pipeline closed as a sanction to Europe amid the long-running conflict with Ukraine, the price of energy could soar, exacerbate the inflationary spiral in the Eurozone and accelerate the recession process that could curb the ECB’s determination to promote subsequent interest adjustments. Inflation may even decline, but as an effect of the downturn in activity.

At this Thursday’s meeting, the ECB is expected to announce the “anti-fragmentation” mechanism for the sovereign debts of the peripheral economies of the Euro Zone. Portugal, Spain, Italy and Greece see an escalation in the cost of financing their debts, given the prospect of monetary tightening by the ECB. The institution must formalize the repurchase of securities from these countries.

In the US, two events opened the door to a further hike in interest rates by the Fed, from 0.75 percentage point to 1.0 point: US consumer inflation, of 9.1% annualized through June, renewed the worst result in 40 years old; and the signs of recession reported in the Beige Book released last week by the institution that monitors activity in 12 districts where the Fed is represented.

On Friday, July 15, however, members of the Fed’s Federal Open Market Committee (FOMC) added water to the boil, reinforcing the likelihood that the rate hike will be reprized by 0.75 point. Result? Markets react positively on Monday.

In Brazil, the approval by Congress of the PEC das Bondades, sanctioned by President Jair Bolsonaro on Thursday, July 14, with R$ 41.2 billion of expenses with payment of aid outside the spending ceiling, imposes greater caution on the BC with demand – which the high interest rate seeks to curb – and with fiscal risks, although the Minister of Economy, Paulo Guedes, assures that these expenses will be covered with extraordinary collections and dividends from state-owned companies.

The three central banks are at different stages of raising interest rates. None of them are able to claim, at this moment, that the restrictive monetary policy cools down inflation. The ECB is the latest in the adjustment. The Fed started raising the rate in March of this year, but inflation remains explosive. The BC of Brazil is the most advanced. It triggered the increase in the Selic a year before the Fed, but the IPCA in 12 months through June is at 11.89%.

Projections for Brazilian inflation for the end of the year – already under the effect of lower fuel prices – range from 7.2% to 7.9% among the largest private banks. Santander Brasil forecasts 7.9%. In a scenario review, the economic department, led by former Treasury secretary, Ana Paula Vescovi, the bank raised the Selic estimate for 2022, from 13.50% to 14.25%.