Policy makers led by central bank President Alexandre Tombini will increase the benchmark Selic rate to at least 7.50 percent from 7.25 percent today, according to 37 of 58 economists surveyed by Bloomberg. It would be the first increase since July 2011 and would reverse the 15-month, 525 basis-point easing cycle begun in August of that year. The remainder of those surveyed forecast the bank will hold rates steady at the record low in place since October.
While rate cuts were intended to revive economic growth, they may be backfiring, as rising prices are crimping a decade- long boom in consumer demand, said Alexandre Schwartsman, a former central bank director who runs consulting firm Schwartsman & Asociados. Growth fell to 0.9 percent last year, the second-slowest in 13 years, while inflation in March jumped to its fastest pace in 16 months.
“The government dug itself into a rut,” Schwartsman said by phone from Sao Paulo. “In order to slow inflation, there will have to be a period of monetary tightening. In order to spur growth, the government needs to tackle productivity.”
A rate rise would make Brazil the first G-20 nation to increase borrowing costs since Russia raised its benchmark rate in September. Mexico last month unexpectedly cut its benchmark rate for the first time since 2009, while Colombia reduced its key rate by 50 basis points in March.
Traders are betting that policy makers will increase rates by 50 basis points to 7.75 percent today before raising borrowing costs to 8.75 percent by year-end, according to swap rate futures. The decision will be announced sometime after 6 p.m. Brasilia time, 5 p.m. New York.
The Bank of Canada today kept its key interest rate unchanged and retained its bias toward tightening. Policy makers held the benchmark rate on overnight loans between commercial banks at 1 percent for the 21st consecutive meeting and lowered their forecast for economic growth.
In the U.K. today, unemployment rose at the fastest pace in more than a year and wage increases slowed, according to data from the Office for National Statistics.
Stocks in Brazil sank for the fourth time in five days as falling commodities prices pushed Brazilian producers lower and the International Monetary Fund cut its forecast for global growth this year. The Bovespa index declined 1.4 percent to 53,216.37 at 11:44 a.m. in Sao Paulo.
Annual inflation in Brazil rose to 6.59 percent in March from a 21-month low of 4.92 percent in June. Policy makers estimate there is a 25 percent chance inflation will exceed 6.5 percent this year, even if they increase the Selic to 8 percent, according to the central bank’s quarterly inflation report released last month.
Retail sales in February fell 0.4 percent, surprising economists whose median estimate was for a 1.5 percent increase. Supermarket sales sank 1 percent as higher prices deterred shoppers, according to Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA.
There is no tolerance of inflation in Brazil, and policy makers are “closely” monitoring economic indicators to choose the best course for monetary policy, Tombini told reporters in Rio de Janeiro on April 12. Brazil is ready to take necessary steps, including higher rates, to control inflation, Finance Minister Guido Mantega said earlier the same day.
President Dilma Rousseff has repeatedly said that Brazil needs to bring capital costs closer to those in advanced economies in order to boost competitiveness. On March 27 she told reporters she opposed anti-inflation measures that compromised economic growth, sending interest-rate futures down. Hours later, she said the market had misinterpreted her comments as a sign of leniency with inflation.
At an event in Belo Horizonte yesterday, Rousseff said Brazil “will not negotiate” with inflation. “We will not have the slightest problem attacking inflation systematically,” she added.
The central bank will raise the Selic to 8.50 percent by December and hold it there for at least a year, according to the bank’s latest weekly survey of economists. The rate will be at that level when Brazil’s presidential election is held in October 2014.
Not every analyst foresees an immediate rate increase. The bank may delay on the prospects of weak global growth and the impact on an uneven recovery in the domestic market, said Jankiel Santos, chief economist at Banco Espirito Santo de Investimentos, who forecasts no rate change at this week’s meeting.
Industrial output, which contracted 3.6 percent last year, fell in February by 2.5 percent from the previous month, the largest drop since December 2008, after rising by 2.6 percent in January.
Consumer demand, fueled by rising real wages and a 29.6 percent average annual credit expansion in five years, has been one of the drivers of growth in the world’s sixth-largest economy. Increasing borrowing costs now could stifle retail sales that declined 0.2 percent in February from a year earlier, after posting 10 percent annual growth as of last August, said Gustavo Bach, chief executive officer of Santa Cruz, Brazil- based Hermes SA direct-seller retail group. Hermes sales in February were unchanged from a year ago.
“Increasing rates now would scare the consumer and dry up credit,” said Bach by telephone from Rio de Janeiro. “If I were Tombini, I’d leave rates alone.” Eighty percent of Hermes sales are on credit, Bach said.
Part of the bank’s dilemma is that the government has focused on stimulating demand by granting tax breaks and pressuring banks to lower loan rates, Schwartsman said. Productivity in Brazil fell .3 percent last year, while it rose 7.4 percent in China, according to New York-based business research group Conference Board.
To heighten productivity and competitiveness, Brazil must reduce its tax rate, improve roads and railways, and expand professional training to overcome shortages of skilled labor, according to the National Industry Confederation, a Brasilia- based association of Brazilian industrial companies.
“They keep pushing measures to stimulate demand. As the central bank has recognized, these measures have less and less of an impact because the supply side is not changing,” said Paulo Vieira Da Cunha, partner at Tandem Global Management LP and a former central bank director. “The result is inflation.”
The risk of inflationary pressure spreading and fueling a vicious cycle of price increases raises concerns among entrepreneurs, who recall how hyperinflation stifled sales and eroded growth in the early 1990s.
“Nobody likes it, but if Tombini has to increase, then he should do so,” said Nelson Hubner, head of Curitiba, Brazil- based smelter and parts maker Hubner Group, in a telephone interview. “The key is knowing the right amount of remedy. We can’t control inflation at the cost of a recession.”
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