Brazil Raises Interest Rate to 12% to Lower Inflation from Two-Year High

Brazil’s central bank slowed the pace of rate increases on a less-than-unanimous vote, saying they need to implement policy adjustments “for a sufficiently long period” to bring inflation to target next year.

Policy makers, led by central bank President Alexandre Tombini, voted 5-2 to raise the Selic rate by a quarter point to 12 percent from 11.75 percent, as expected by 15 of 58 analysts surveyed by Bloomberg. Forty-one analysts forecast a half-point increase and two predicted a pause. The bank said that two board members voted for a half-point increase.

The rate rise was smaller than the 0.5 percentage-point increases the bank implemented at its January and March meetings. Policy makers are betting that a combination of higher borrowing costs, curbs on consumer lending and government spending cuts will be enough to bring inflation back to its target in 2012, according to the central bank’s quarterly inflation report, published March 30.

Because of the “balance of inflation risks” and “uncertain moderation of domestic activity,” policy makers said in their statement that they see “the implementation of adjustment in monetary conditions for a sufficiently long period is the most adequate strategy to guarantee the convergence of inflation to the target in 2012,” according to their statement that accompanied their decision.

Currency Appreciation

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 25 basis points rather than 50, said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.

“The central bank has a better outlook for inflation than the market does,” Rangel said, speaking by telephone before the rate decision. “It’s clear to everyone that foreign exchange is a big thing here. That clearly adds to that more benign assessment of inflation.”

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.

Economists surveyed by the central bank expect consumer prices to rise 6.29 percent this year, and 5 percent in 2012, according to an April 15 survey. The central bank itself expects consumer prices to rise 5.6 percent this year, and 4.6 percent in 2012, according to its so-called reference scenario, which assumes an interest rate of 11.75 percent.

Commodity Prices

The central bank is betting that much of the quickening of inflation this year will fade as a supply shock caused by higher commodities prices recedes, said Pedro Tuesta, an economist for Latin America at 4Cast Inc.

“They feel that they don’t need to rush to bring inflation down, they can wait until 2012,” Tuesta said, speaking by telephone from Washington before the rate decision was announced. “They feel the macro-prudential measures will do the job. They feel they don’t need to hike that much.”

Food and beverage prices rose 2.15 percent in the first three months of 2011, after increasing 10.4 percent in 2010, according to data collected by the central bank.

Tuesta forecasts inflation of 6.3 percent this year, and 5.2 percent in 2012.

Not Tolerant

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 Finance Ministry doubled to 3 percent the so-called IOF tax on consumer credit.

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 central bank forecasts credit growth of 13 percent in 2011, Tulio Maciel, acting head of the bank’s economic research department, said March 29.

Retail Sales

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.”

The yield on interest rate futures maturing in May 2011 rose five basis points to 11.92 percent. The real gained 0.6 percent to 1.5662 per dollar, its strongest close since Aug. 4, 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.

Chile’s central bank raised its benchmark interest rate for the 10th time in 11 months at its April 12 policy meeting. Peru’s central bank raised borrowing costs a quarter point to 4 percent in April, its ninth increase in 12 meetings. Colombia raised its benchmark interest rate by 0.25-point for a second straight month in March to 3.5 percent.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

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