How Inflation in the United States Disrupts the Brazilian Economy and Affects Savings – 11/24/2021

A The highest inflation in the United States in 30 years Already affecting the Brazilian economy. Not because of the high price, but because of the actions the US government must take to cause side effects in Brazil.

In the chain of events, the US Federal Reserve (Fed, US Federal Reserve) will be required to take measures such as inflation in the United States, reducing the money in circulation and raising interest rates. These measures strengthen the dollar against the dollar. This stimulates inflation in Brazil and causes our interest rates to rise rapidly. The economic recovery is becoming more difficult, and investments such as savings, treasuries and stocks are also being affected. Storage ends in success.

According to economists heard by UOL, These factors are already stifling Brazilian economic growth, but they could worsen if inflation in the United States does not slow down.

Why is inflation rising in the United States?

Inflation in the United States rose to 6.2% in the 12-month period to October, according to the Consumer Price Index. Economists point to three factors as the main causes of this process.

More expensive raw materials: The global economic recovery after the worst of the epidemic has boosted demand for raw materials (metals, oil, grains and meat).

More expensive energy: Rated oil affects the prices of petrol, diesel and thermal, which are the basis of the prices of almost all activities in the US economy. Restructuring of these items leads to relocation to other products of the economy.

Lack of inputs in industries: The shortage of materials used by industry in the wake of economic activity has made these products even more expensive.

US inflation reflects everything that happens in the supply chain during epidemics around the world, in the context of expansionist government policies.
Silvio Campos Neto, partner and economist at Tendency Consultoria

What steps are being taken there?

For most central bank officials, US inflation is driven by factors Unstable. But as inflation peaked at a three-decade high, the US Federal Reserve signaled that the price cycle should stop.

Reduce the currency in circulation: For this, the central bank has two weapons. One is to reduce the amount of currency in circulation – less money in the economy, less room for price changes.

The central bank buys $ 120 billion worth of bonds every month from investors and banks and pours that money into the economy to fight the epidemic.

But despite the worsening situation, the focus is now on inflation. The central bank has warned it will cut these injections by $ 15 billion in the last quarter of 2021. Moreover, until this stimulus is fully withdrawn, these activities will be reduced throughout 2022.

Interest will increase: The central bank’s next step in controlling inflation is to raise interest rates to 0.25% per annum. Economists expect the rate to rise to 0.75%, but only from the second half of 2022.

What are its implications in Brazil?

Economists say the slowdown in dollar circulation and rising interest rates in the US economy are causing the dollar to appreciate against other currencies, including the real currency.

Economists say the impact is already being felt before the US Federal Reserve actually begins operations. UOL.

The signal from the central bank to raise interest rates and reduce bond repurchase activity has already attracted more foreign investment to the US economy, reducing the flow of resources to other countries, such as Brazil.
Marcos Antonio de Andrade, Professor of Economics at Mackenzie Presbyterian University

More dollars in Brazil

The chain of events caused by high inflation in the United States affects the Brazilian economy through the dollar channel, which causes inflation, which in turn raises interest rates. Economists say this is hampering economic growth.

Swelling: In addition to global inflation, in Brazil, inflation is rising due to the devaluation of the real value against the dollar. IPCA (Wide National Consumer Price Index), the country’s official inflation, It has already reached 10.67% accumulated in 12 months.

The withdrawal of the central bank’s stimulus and the expectation that US interest rates will rise will push the dollar against other currencies. The stronger the dollar the weaker the real, which accelerates inflation in Brazil. Therefore, interest rates will have to increase further here.
Felipe Sichel, Chief Strategy Specialist, Modalmais Digital Bank

Fee: To bring inflation to an official target of – 2.25% per annum to 5.25% – the central bank has already begun raising interest rates to 2% per annum in March. The movement started slightly with a 0.75 percentage point increase, but has already accelerated to a strong increase of 1.5 percentage points. Basic interest rate (Selic) already 7.75%. At this Market expectation In 2022, interest rates will rise to 11%.

Inflation in the United States puts pressure on US monetary policy, which in turn puts pressure on monetary policy in Brazil with high interest rates. All of this will result in the end of a peaceful situation in which funding can be obtained at a negative or very low interest rate.
Emerson Marshall, coordinator of the Center for Applied Macroeconomics Research at FGV Eesp

Low growth: Economists say dollar, uncontrolled inflation and rising interest rates are holding back the Brazilian economy. For example, new projects or business expansion start to cost more due to US currency, more expensive raw materials and higher interest rates, which makes loans more expensive. Next year, for example, market forecasts that GDP (GDP) will grow by less than 1% of the projected 4.5% in 2021. But there are already economists talking about a recession next year.

Since the interest rate here is 11%, I do not know how GDP will grow to 1%. This account may be incorrect or we may have a recession.
Roberto Attuch is an economist and CEO of the analytics firm OmreSearch

Storage also suffers

In the financial markets, US inflation, which has caused interest rates to rise there, has prompted local government and companies to pay higher rates to attract investors.

The truth is, US interest rates are the global reference for earning a steady income in government and corporate securities.

If the US fee is higher, the fees offered by other countries should be higher, convincing someone to put money here, and not in the US where the default risk is lower.

In the investment market, this increase in interest rates means higher returns on fixed income investments such as savings accounts, Treasury securities and CDBs.

Shares traded on the stock market and real estate funds are vulnerable to volatility and risk of currency devaluation.

The frame can get worse

According to economists heard by UOL, The current indicators of the Brazilian economy and forecasts for next year have already taken into account that from this year onwards, the central bank will gradually reduce the inflow of dollars into the US economy by reducing the withdrawal of government bonds. Will rise in the second half of 2022.

But if inflation continues to rise in the United States without showing signs of slowing down, the central bank’s measures will be drastic – a strong cut in dollar payments to the economy and the expected and strong rise in interest rates.

Moreover, in this case, the impact on the Brazilian economy would be even worse.

In our economy, this is already priced [previsto] The action of the central bank, but if it accelerates it may further affect the economy. If the Fed starts to see the market at its pace, Brazil will suffer even more.
Roberto Attuch, Omrearch.

There is one more bad factor, economists say: next year Brazil will already be a factor in the volatility of markets: general elections.

Brazil already has major problems in the United States other than inflation, such as monetary policy and the rise of the dollar. [gastos do governo]. But the worsening US inflation and the risk of a strong interest rate tightening add even more concern to the medium term.
Philip Chichel, Model Corn