Central Bank of Brazil president Gabriel Galípolo said on Tuesday that long-term interest rates in Brazil are shaped in part by investors’ perception of risk tied to the country’s credibility. He spoke at an event promoted by the Brazilian Foreign Exchange Association (Abracam) in São Paulo.
Galípolo said that a risk premium persists because investors remember past shocks. Calm periods, if they are short, will not compress that risk, he said, adding that the memory of shocks will sustain the premium.
Shocks and the exchange rate
Among the risks he cited was the chance of exchange-rate shocks causing a sharp depreciation of the real. He said lasting reductions in perceived risk would require a long stretch without a negative shock.
Galípolo also described the currency mismatch in the debt market. Issuing debt in domestic currency is an advantage for the issuer, he said, but a risk for the creditor, who could become poorer in dollar terms if a devaluation occurs.
Market backdrop
The remarks came as the dollar rose and future interest rates advanced after Lula won the second round of the presidential election against Flávio Bolsonaro. The Selic benchmark stands at 13.75 percent per year. DI futures for maturities from 2028 to 2035 price rates between 14 and 15 percent per year, and about 51 percent of Brazil’s public debt is indexed to the Selic.
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The dollar stood at 5.58 reais on the afternoon of the speech, up from about 5 reais before the second round, according to figures given in the report. Galípolo did not refer directly to recent examples or to the current government.
Source: Central Bank of Brazil
