Galípolo's warning: the central bank doesn't control long rates. And long rates set agribusiness funding costs
At a Barclays event, Brazil's central bank chief said the only way to compress the yield curve premium is to reduce risk, which comes down to credibility. A direct message to Brasília.
To save you time4
- What did Galípolo say?
- That the central bank can't control the yield curve and that the only way to compress premiums is to compress risk, which is tied to credibility.
- Why have long rates risen?
- According to Reuters, investors are worried about the government's ability to contain public debt growth after Lula's re-election.
- Where is inflation?
- At 4.6% over 12 months, above the 3% target. Galípolo said this "bothers the central bank a lot."
- What changes for agribusiness?
- Long-term credit such as CRAs and investment loans tracks the futures curve. Without lower premiums, money stays expensive.
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Straight to the message: Brazil's central bank governor, Gabriel Galípolo, said on Friday (13) at a Barclays event that the bank can't control the yield curve. The line that matters: "The only way to compress the premium is by compressing risks, which is directly tied to credibility."
In plain terms: the central bank sets the Selic, the very short-term rate. Rates for 2, 5 or 10 years are set by the market, based on the risk it sees. And that premium (the extra investors demand to lend for longer) has gone up.
Why it matters
According to Reuters, long rates have climbed sharply since Lula's re-election last month, on doubts about the government's ability to rein in debt and mandatory spending. That backdrop led the central bank to halt its easing cycle, with the Selic at 13.75%.
Galípolo also said 12-month inflation of 4.6%, above the 3% target, "bothers the central bank a lot." And he added that with the economy at full employment for several quarters, further growth now depends on productivity gains.
What matters for agribusiness
If you finance machinery, storage or land, your cost doesn't follow the Selic. It follows the futures curve. The same goes for long-dated CRAs and CPRs. So until the premium falls, farm money stays expensive, even with the Selic on hold.
And the central bank made clear it won't fix this alone. Relief has to come from Brasília.
What I'd watch
The Senate vote on amendments to the fiscal package on Tuesday (17), and its path through the lower house. That's the first concrete test of the credibility Galípolo was talking about. If the market buys it, long rates will be the first to react.
