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Brazil’s Central Bank Sees Key Rate Falling to Single Digit
Brazil’s central bank said there is a “high” chance its benchmark rate will drop below 10 percent, signaling it remains focused on spurring economic growth even as record-low unemployment pressures consumer prices. Yields on interest rate futures plunged.
The bank’s board, led by President Alexandre Tombini, said it sees significant structural changes in Brazil’s economy that will allow it to continue lowering borrowing costs, according to the minutes from its Jan. 17-18 meeting published today.
After growth in the world’s second-biggest emerging market slowed in the second half of last year more than expected, and in the absence of a solution to Europe’s debt crisis, the bank said it sees “a high probability for the realization of an outlook in which the Selic rate moves toward a single digit.” The board voted unanimously last week to reduce the rate to 10.5 percent, as forecast by all 67 analysts surveyed by Bloomberg.
Following today’s minutes, traders scrapped bets that signs of faster growth, quickening inflation and an improved outlook in global markets would lead policy makers to end their easing cycle soon. The yield on interest rate futures maturing in Jan. 2013 fell 18 basis points to 9.66 percent. It was the biggest drop since October.
“After the recent developments domestically and internationally, the market was expecting the Selic at 10 percent,” said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo. “We will revise our forecast downwards for sure.”
‘Trend’
The government will maintain its current fiscal policy, which is sufficient for interest rates to fall to single digits, Finance Minister Guido Mantega said today.
Inflation would still converge toward its 4.5 percent target, he added.
“I don’t know if we’ll reach the target exactly, but what matters is the trend,” he said in a conference call with reporters.
Analysts are not convinced. The explicit signaling of a lower rate, combined with a separate report today showing unemployment in December fell to a record, means the bank is unlikely to bring inflation to its 4.5 percent target this year or in 2013, they said. Inflation in mid-January was 6.44 percent.
“The strategy being adopted is to prioritize economic growth at the expense of more control over inflation,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil in Sao Paulo, said in a phone interview.
Jobs
Today’s jobs report showed that Brazil’s labor market remains heated as the country spends billions of dollars revamping its infrastructure ahead of the 2014 World Cup and Petroleo Brasileiro SA and other companies develop the biggest oil finds in the Americas in three decades.
The unemployment rate fell to 4.7 percent in Brazil’s six biggest metropolitan areas last month, spurred in part by seasonal hiring ahead of Christmas. Economists had expected the rate to fall to only 4.9 percent from the previous record of 5.2 percent in November, according to the median estimate of 38 analysts surveyed by Bloomberg.
Brazil has taken the lead among emerging market economies in cutting borrowing costs to protect itself from the European debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by policy makers in Russia, Indonesia, Chile, Israel and elsewhere.
Rate, Growth, Inflation
President Dilma Rousseff, a career bureaucrat who took office a year ago, has repeatedly said that her goal is to lower interest rates that are still the highest among any of the Group of 20 richest nations. Brazil will adopt this year a “rigorous” fiscal policy to pave the way for lower rates, Finance Minister Guido Mantega said this week.
Even the bank has acknowledged inflationary risks arising from strong domestic demand. In the minutes today, it said that the labor market remains “robust” and may lead to wage increases that could have “negative repercussions on inflation dynamics.”
Consumer prices rose 0.65 percent in mid-January from the previous month, the biggest jump since May, while annual inflation, at 6.44 percent, remains near the 6.5 percent upper limit of the bank’s target range. Inflation will slow to 5.29 percent this year, according to a Jan. 20 central bank survey of about 100 economists.
Recovery Signs
Serrano said he is now likely to revise upwards his current forecast for prices to rise 5.4 percent this year and 5.1 percent in 2013.
“The bank said inflation dynamics have improved, but we think they are getting worse,” he added.
Brazil’s $2.1 trillion economy is showing signs of recovering after shrinking in the third quarter for the first time since 2009.
The central bank’s economic activity index, a proxy for gross domestic product, expanded at its fastest pace in 19 months in November, reversing a three-month contraction, while retail sales grew at their fastest pace in 15 months.
The International Monetary Fund said this week that Latin America’s biggest economy should expand 3 percent this year, less than the 4 percent the government is targeting and in-line with the pace of growth last year.
Mexico, the region’s second-biggest economy, will grow 3.5 percent as the U.S. recovery gains momentum, the IMF said.
The government has been helping sustain growth by cutting taxes and easing restrictions on consumer credit, which is now expanding at an 18 percent annual pace.
The faster growth has helped lure foreign investment that’s behind a 7.3 percent surge by the real this year, the second- best performance of 16 major currencies tracked by Bloomberg after the Mexican peso.
To contact the reporters on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net
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