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Posted on April 20, 2011
Brazil’s central bank signaled it may keep raising borrowing costs for a longer period of time than many economists had expected after slowing the pace of rate increases yesterday.
Policy makers raised the benchmark Selic rate by a quarter point to 12 percent, surprising the 41 of 58 analysts surveyed by Bloomberg who expected them to maintain the 50 basis point pace of the previous two meetings. Fifteen analysts predicted the smaller increase, which was anticipated by traders, according to interest-rate futures. Two dissenting members of the board favored raising the Selic to 12.25 percent.
The bank’s seven-member board said in a statement that an adjustment of monetary conditions for a “sufficiently long period” is the “most adequate” strategy to guarantee inflation returns to its 4.5 percent target in 2012. The board, led by President Alexandre Tombini, said it reduced the pace of increases because of uncertainty over the global recovery and Brazil’s domestic slowdown.
Inflation expectations could deteriorate further if analysts judge the strategy insufficient to rein in consumer prices that rose this month at their fastest pace since 2008, said Zeina Latif, a senior economist with RBS Securities Inc.
“You can lose credibility very fast but to regain it is very slow,” said Latif in a phone interview from Sao Paulo. “Even though they signaled that they will do more, it doesn’t mean markets will be comfortable. It doesn’t mean that markets will celebrate.”
Consumer prices rose 6.44 percent in the year through mid- April, close to the upper limit of the central bank’s target range of 4.5 percent, plus or minus 2 percentage points. Analysts surveyed by the central bank on April 15 expect prices to rise 6.29 percent this year, and 5 percent in 2012.
The same survey showed economists had expected policy makers to raise the Selic to 12.25 percent yesterday, then keep it on hold for the rest of the year.
The signaling of “softer” increases to come is a “costly strategy given the de-anchoring of inflation expectations and recent inflationary surprises,” said Marcelo Salomon, chief Brazil economist for Barclays Capital.
“It would be better to go more proactive and continue at 50 basis point pace and then stop,” Salomon said in an interview from New York.
Yesterday’s decision reinforces the bank’s strategy of relying on a mix of policy tools, including budget cuts and measures to curb consumer lending, to fight inflation, said Jankiel Santos, chief economist at Espirito Santo Investment Bank in Sao Paulo.
Traders have pared bets for the year-end Selic since policy makers said March 10 that such measures are a “rapid and potent” weapon. The yield on interest rate futures maturing in May 2011 rose five basis points yesterday to 11.92 percent.
Total outstanding credit in Brazil’s economy rose 21 percent from a year earlier in February, to 1.74 trillion reais. Tombini told lawmakers March 22 that growth in consumer credit of more than 15 percent needs to be monitored “very carefully” to avoid “excessive risks.”
The 6.4 percent appreciation of Brazil’s currency against the dollar in the past month may have been decisive in persuading policy makers to increase borrowing costs by a smaller amount, said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.
“That clearly adds to the bank’s more benign assessment of inflation,” Rangel said before the decision was announced.
The real gained 0.6 percent to 1.5663 per U.S. dollar, its strongest close since August, 2008. The real’s gain in the last month is the third best among the 16-most traded currencies tracked by Bloomberg after the New Zealand and Australian dollars.
While fighting currency gains, Brazil is raising borrowing costs along with policy makers in Russia, India and China — the other so-called BRIC nations — that are contending with similar inflationary pressures as commodity prices surge. Regional peers Chile, Colombia and Peru have also raised their borrowing costs in the past month.
Brazil’s bank may be expecting a supply shock caused by higher commodities prices globally to recede in the coming months, said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. Food and beverage prices rose 2.15 percent in the first three months of 2011, after increasing 10.4 percent in 2010.
The central bank expects consumer prices to rise 5.6 percent this year, and 4.6 percent in 2012, according to its so- called reference scenario in its March 30 quarterly inflation report, which assumes an interest rate of 11.75 percent.
“Given the recent dovishness showed by the monetary authority, the stability of the Selic rate at 12 percent should not be seen with surprise,” Enestor Dos Santos, senior Brazil economist for BBVA in Madrid, said in a report.
Finance Minister Guido Mantega said April 18 that Brazil is neither “patient” with nor “tolerant” of faster inflation, and that the measures already taken will be effective after a lag.
President Dilma Rousseff’s government cut 50.7 billion reais ($32.4 billion) from its 2011 budget to help curb inflationary pressure. In December, the central bank raised banks’ reserve requirements to slow credit growth, and this month the government doubled to 3 percent the so-called IOF tax on consumer credit.
Growth in Latin America’s biggest economy is slowing after a 7.5 percent expansion last year, though it’s unclear how quickly.
Capacity utilization rose to its highest level in three years in February as the central bank’s economic activity index, a proxy for gross domestic product, rose at the fastest pace since August. Brazil is close to full employment, Mantega said April 18, a day before the government reported a 6.5 percent March jobless rate that was the lowest for the month since 2002.
Retail sales unexpectedly fell 0.4 percent in February, down from a revised 1.1 percent increase in January. Tombini said March 22 that the retail sector is “perhaps the best expression of the current state of the economy.”
To contact the reporter on this story: Matthew Bristow in Brasilia at firstname.lastname@example.org
To contact the editor responsible for this story: Joshua Goodman at email@example.com