The recent review of fiscal targets by the Brazilian government generated significant repercussions in the financial market, affecting expectations for the Selic rate. Consequently, initially, it was expected that the pace of cuts in the basic interest rate would continue, boosting the recovery of the economy. However, given the new fiscal projections, the scenario has changed considerably. Thus, uncertainty has increased and investors have started to reevaluate their strategies. Analysts now predict that the Selic rate will remain unchanged or will increase, depending on the economic and political situation.
However, the relaxation of fiscal targets changed this scenario, leading to a review of projections for the Selic rate.
Before Review
- Expectation of Selic Rate Cuts: The market was expecting cuts in the Selic rate, with expectations of ending the year around 10%. This outlook was supported by the improvement in economic activity and the benign inflationary environment;
- Favorable Factors: The fall in inflation, in addition, the resumption of growth in GDP and the perception of fiscal control by the government contributed positively to optimism regarding the trajectory of the Selic rate.
After Review
- Reduced Expectations: The review of fiscal targets, relaxing the public spending ceiling, generated uncertainty in the market and led to a revision of expectations for the Selic rate. Therefore, analysts now predict that the basic interest rate will end the year between 10.5% and 11%;
- Uncertainty Factors: The increase in the fiscal deficit and the possibility of a new inflationary cycle in the future, as a result of fiscal flexibility, explain the change in projections for the Selic rate.
Market Impacts
- Devaluation of the Real: The review of fiscal targets contributed to the devaluation of the real against the US dollar, reflecting greater fiscal uncertainty and increased country risk;
- Increase in Interest Rates: Maintaining the Selic rate at high levels for a long time increased interest rates, harming credit and investments.
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