Brazil Signals Record-Low Interest Rates Are Here to Stay

Brazil’s central bank signaled it’s ready to keep interest rates at a record low, rejecting the view that a jump in food prices and faster economic growth will lead to an acceleration in inflation.

Policy makers, in the minutes to their Aug. 28-29 meeting at which they cut interest rates for a ninth straight time, said that bad weather in the U.S. and Brazil is weighing on the price of food and beverages. All the same, the supply shock is less intense than one in 2010 and the country’s long-term price outlook remains favorable with inflation slowing toward the 4.5 percent target, the bank said.

While traders remain split on whether Brazil will reduce its benchmark rate a quarter point in October, they have trimmed bets central bank President Alexandre Tombini will be forced to increase borrowing costs early next year to keep inflation in check. The bank’s board voted unanimously last week to cut the Selic rate 50 basis points to a record 7.5 percent and has lowered borrowing costs 500 basis points over the past year, more than any other Group of 20 nation, to revive an economy that has been stagnant for the past year.

“The name of the game is to stop cutting the Selic in the short term, but keeping it low in the future,” Andre Perfeito, chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo.

The swap rate on the contract maturing in January 2014, the most traded in Sao Paulo, fell four basis point to 7.78 percent at 9:55 a.m. local time. The real, which has declined 8.5 percent this year against the greenback, was little changed at 2.0392 per U.S. dollar.

Futures Market

“If the prospective scenario were to allow for an additional adjustment in the monetary conditions, this move should be carried out with maximum parsimony,” the bank said in the minutes, reiterating language from its decision last week that economists say signals an end to the easing cycle initiated last August.

President Dilma Rousseff’s administration has expanded the scope of its policy actions to revive growth, which trails that of Russia, India and China, the so-called BRIC nations of major emerging markets. In addition to pressuring commercial banks to lower what they charge for loans, the government last week extended until November tax cuts on car purchases and appliances for several months amid signs the stimulus measures have been working.

Slow Growth

Brazil’s car dealership association Fenabrave said this week that monthly car sales reached a record high 420,000 in August. Brazil’s industrial production rose for the second consecutive month in July, the first back-to-back increase in more than a year, while retail sales in June saw their biggest jump since January.

Still, economists say there are few signs of a sustained recovery. Gross domestic product expanded 0.4 percent in the second quarter, missing economists’ estimates for 0.5 percent growth, and the consumer loan default rate rose in July to 7.9 percent, a 30-month high. Analysts cut their forecast for growth this year for the fifth straight week, to 1.64 percent, in the last survey taken by the central bank on Aug. 31.

The pace of consumer price increases has also quickened, putting a limit on the government’s drive to reduce interest rates further. Inflation accelerated for a second month in August to 5.24 percent, on increasing food and beverage prices and rising wages. Brazil’s central bank targets inflation of 4.5 percent, plus or minus two percentage points.

The central bank said inflation will continue to slow towards the mid-point of the target on a non-linear way.

The outlook for inflation, “despite being negatively impacted in the short term by supply shocks stemming from climatic event abroad and domestically, remains with favorable signs for longer term,” the bank said.

To contact the reporters on this story: Matthew Malinowski in Santiago at mmalinowski@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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