Brazil's Central Bank Says Increase to 11.75% Part of `Adjustment Process'

Brazil’s central bank signaled it will raise the benchmark interest rate for a third straight meeting next month, after pushing borrowing costs yesterday to a two-year high to cool inflation.

Policy makers raised the overnight rate to 11.75 percent from 11.25 percent in a unanimous vote, saying the decision was the “continuation of the adjustment process.” The move matched estimates of 44 of 51 analysts surveyed by Bloomberg. Seven economists had forecast the bank would step up the pace of tightening after a half-point rate increase in January.

Annual inflation in the $1.57 trillion economy has accelerated every month since August, prompting the bank to raise interest rates in January for the first time since July. The statement accompanying the decision suggests policy makers aren’t considering bigger rate increases to rein in the fastest inflation in more than two years, Gray Newman, chief Latin America economist for Morgan Stanley in New York, said.

“A month or so ago, a lot of market participants were expecting a much more aggressive hiking cycle,” Newman said in a phone interview from New York. “They could move by a half- point in April, then a quarter-point after that. But April could certainly be the last hike of the year.”

Newman forecast policy makers will increase rates to 12.50 percent by June.

Market View

Traders, on the other hand, are wagering policy makers may raise borrowing costs to as high as 13 percent by year-end, according to Bloomberg estimates based on interest rate futures.

The yield on interest rate futures contract maturing January 2012 fell two basis points to 12.51 percent at 10:43 a.m. New York time.

Brazil is relying on a mix of higher interest rates, spending cuts and measures to curb credit growth to cool inflation.

Bigger rate increases will fail to bring inflation back to target this year, said Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, who expects consumer prices to increase 4.6 percent next year.

“The short end of the yield curve should re-price the risk that the Banco Central do Brasil would step up the pace of hikes,” Marcelo Salomon, chief economist for Brazil at Barclays Plc, wrote in a note to clients yesterday. “The statement indicates to us that they have chosen not to.”

Prices

Inflation, as measured by the benchmark IPCA-15 index, accelerated to 6.08 percent in the year through mid-February, the fastest pace since December 2008. In the month through mid- February, prices rose 0.97 percent, the highest since April 2003.

Gross domestic product grew 0.7 percent in the fourth quarter from the previous quarter, compared with a revised 0.4 percent in the third quarter, the national statistics agency said today in Rio de Janeiro. The growth rate compares with the median forecast of 0.8 percent in a Bloomberg survey of 32 analysts.

“Following the process of adjustment of monetary conditions, the monetary policy committee decided, unanimously, to raise the rate to 11.75 percent a year, without a bias,” policy makers said in the one-sentence statement announcing their decision.

“The fact the statement was very short and clean signals policy makers will keep their plan of carrying out three 50 basis-point increases,” said Roberto Padovani, chief economist at Banco WestLB do Brasil. “The statement doesn’t signal any change to the strategy the central bank laid out when it started the hiking cycle”

Economists expect consumer prices to rise 5.8 percent this year before slowing to 4.78 percent next year, according to a central bank survey of about 100 analysts published this week.

‘Probably Insufficient’

The central bank targets inflation of 4.5 percent with a two percentage point leeway either side to accommodate for price shocks.

“This move is probably insufficient to reverse the recent sharp deterioration of inflation expectations, Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo, wrote in a note to clients after the rate decision. ‘‘The absence of any sense of urgency from the central bank should imply additional deterioration of inflation expectations.’’

Total outstanding credit in the Brazilian economy expanded in January at its slowest pace in almost two years after the central bank raised reserve and capital requirements in December to prevent a credit bubble.

The credit measures will have the same impact on inflation as a 0.75 percentage-point interest rate increase, according to a central bank survey of economists published Feb. 24.

President Dilma Rousseff’s government this week announced cuts to spending on defense, education, housing, subsidies to companies and farmers and payroll outlays as part of its plan to cut 50.1 billion reais ($30.2 billion) from this year’s budget.

To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net Andre Soliani in Brasilia at asoliani@bloomberg.net

To contact the editor responsible for this story: Bill Faries at wfaries@bloomberg.net

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