Brazil Central Bank Signaling More Rate Increases Even as Inflation Slows
Policy makers raised the benchmark Selic target rate by a quarter point to 12.25 percent on June 8, continuing a strategy they began in April of tightening policy at a slower pace than earlier in the year.
While policy makers said that the inflation outlook is showing “more favorable signs” there remains “higher than usual levels of uncertainty” that requires them to remain “especially vigilant.”
“The Copom understands that the adjustment of monetary conditions for a sufficiently long period continues to be the most-adequate strategy to guarantee convergence of inflation to the target in 2012,” the bank said.
The yield on the interest rate futures contract maturing in January 2012, the most-traded in Sao Paulo today, rose two basis points, or 0.02 percentage point, to 12.4 percent at 11:39 a.m. New York time. The real weakened 0.5 percent to 1.6084 per U.S. dollar.
“The consensus is that they will raise rates at least one more time,” Caramaschi said, speaking by phone from Sao Paulo. “The tone was tougher than expected.”
More Rate Increases
Central bank President Alexandre Tombini has raised the Selic by 1.5 percentage points in 2011, and traders are betting on a further 0.50 percentage point of increases this year, according to Bloomberg estimates based on interest rate futures.
Brazilian President Dilma Rousseff’s government is also using budget cuts and measures to curb credit as it seeks to slow the fastest inflation in six years.
“They are trying to stay the course,” said Tony Volpon, Latin America strategist at Nomura Holdings Inc. “They are still signaling as a base case scenario an increase of 25 basis points in July. But they recognize that the global economy is slowing down substantially, and that’s been one of the bigger reasons why they think the inflation scenario has improved.”
“The door has been opened to a pause if the scenario worsens,” Volpon added.
Breaching the Limit
Consumer prices rose 6.55 percent in the year through May, exceeding the 6.5 percent upper limit of the bank’s target range for a second straight month. The bank targets inflation of 4.5 percent, plus or minus two percentage points.
Policy makers said the outlook for 2011 inflation has slowed under both its so-called reference and market scenarios, while the 2012 outlook remained unchanged. The bank’s forecast for inflation remains above the 4.5 percent mid-point of its target range this year and next in both scenarios.
Volatility on international markets has increased since April, along with uncertainty over the recovery in the global economy, the central bank said.
The minutes signal policy makers’ increasing concern with external risks from the debt crisis in Europe or a possible slowdown in the Chinese economy, said Enestor dos Santos, senior Brazil economist for BBVA in Madrid.
“Interest rates could continue being adjusted upwards after July if the ‘very important risks’ of wages increasing more than productivity materialize, or could even be left unchanged in July if the external environment deteriorates,” Dos Santos wrote in a note to clients.
The government’s budget surplus before interest payments in the first four months of the year was 57.3 billion reais ($35 billion), equivalent to almost half of the annual target of 117.9 billion reais. The central bank expects a surplus equivalent to 2.9 percent of gross domestic product this year, and 3.1 percent in 2012, according to the minutes.
After falling to a series of record lows in 2010, the jobless rate in April declined to 6.4 percent, the lowest level on record for the month, keeping pressure on policy makers trying to cool demand.
Total outstanding credit expanded 21 percent in the year through April. Tombini told lawmakers on March 22 that consumer credit growth above 15 percent needs to be monitored closely.
Other indicators suggest the economy is slowing. Industrial output and retail sales unexpectedly fell in April, and capacity utilization dropped to its lowest level in more than a year. The default rate on consumer loans rose for a fourth straight month in April.
Growth in Latin America’s biggest economy will slow to 4 percent this year from 7.5 percent in 2010, according to a central bank survey of economists published June 13.
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