Brazil Steps Up Pace of Rate Increases as Inflation Hurts Growth

Brazil’s central bank unexpectedly accelerated the pace of interest rate increases, as inflation near the top of its target range forestalled the economy’s rebound in the first quarter.

The bank’s board, led by President Alexandre Tombini, yesterday voted unanimously to raise the benchmark Selic rate by a half-point to 8 percent, matching the forecast of 19 of 57 economists surveyed by Bloomberg. Thirty-eight analysts expected a second straight 25 basis-point increase.

Yesterday’s decision is the first time since Tombini became the head of the central bank in 2011 that policy makers surprised analysts surveyed by Bloomberg by setting the key rate at a higher-than-forecast level. The half-point increase will prompt traders to boost bets Tombini will raise the Selic to 8.5 percent in July, a move that seemed unlikely earlier yesterday after economic growth missed economists’ estimates for a fifth straight quarter, said Roberto Padovani, chief economist at Votorantim Ctvm Ltda

“The inflation problem required a more robust monetary policy cycle, even with weak economic growth,” said Carlos Kawall, chief economist at Banco J. Safra. “It was important that the decision was unanimous so as not to give the idea of a divided central bank, which would weaken the decision.”

Kawall expects one more half-point rise, followed by two more quarter-point increases this year.

Swap rates on the contract maturing in January 2014 fell seven basis points, or 0.07 percentage point, to 8.06 percent, the biggest drop since April 18. The real weakened 1.7 percent to 2.1106 per dollar.

‘Positive Move’

Brazil is the only country in the Group of 20 nations whose central bank is raising its key rate. In the past month, countries including Israel, the European Union, Australia and India have all lowered borrowing costs.

The central bank had showed “a renewed and unexpected commitment to anchor inflation,” Alberto Ramos, senior Latin America economist at Goldman Sachs Group Inc., said in a note to clients.

Annual inflation accelerated for nine straight months through March to 6.59 percent, above the top of the central bank’s target range of 2.5 percent to 6.5 percent. In April, year-on-year inflation eased to 6.49 percent.

“The central bank’s decision was a positive move,” Flavio Serrano, senior economist, Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “Inflation has been high for a while and it hurts investments, business confidence and consumption.”

Inflation, Currency

Policy makers yesterday said the “decision will contribute to put inflation on a decline and assure that this trend will persist next year,” according to their statement posted on the central bank’s website.

Analysts who cover Brazil’s economy forecast year-end inflation at 5.81 percent, up from a previous projection of 5.71 percent a month ago, according to the central bank’s latest weekly survey of about 100 economists.

Inflation is helping to undermine Brazil’s decade-long consumer-led boom. Household spending rose 0.1 percent in the first quarter -- its worst performance since 2011.

Brazil’s real yesterday plunged to a five-month low after Finance Minister Guido Mantega said the two-month sell-off isn’t a concern and that the government won’t use the exchange rate to curb inflation.

The real has fallen this month on signs of economic weakness and speculation that the U.S. Federal Reserve will curtail a program of bond purchases that has lifted emerging market assets. A weaker real raises the costs of imports.

GDP, Expectations

Brazil’s economy expanded 0.55 percent in the first quarter, the national statistics agency said yesterday.

The result was lower than the 0.64 percent pace set in the fourth quarter of 2012, and below the 0.9 percent median forecast of economists surveyed by Bloomberg. The first-quarter growth report prompted traders to increase their bets for a 25 basis-point rate increase yesterday.

Following yesterday’s rate decision, the market will again bet on a longer and more intense tightening cycle, said Padovani.

“The market will go back to 50 basis points, it fell too much,” he said by telephone. “It will bet on a longer cycle.”

Brazil isn’t planning new stimulus measures and government efforts to boost investments are working, Mantega said yesterday.

Industrial production in March expanded 0.7 percent after plunging the most since 2008 in February.

Anchoring Expectations

Brazilian companies have posted their longest stretch of earnings disappointments on the back of the country’s uneven recovery.

Thirty-seven of the 65 companies on the Ibovespa (IBOV) index reported first-quarter results that trailed analyst’s estimates. Four companies posted unexpected losses, including homebuilder Gafisa SA (GFSA3) and mining company MMX Mineracao & Metalicos SA. (MMXM3)

Brazil’s economy expanded 0.9 percent last year, the slowest pace since 2009. Economists surveyed weekly by the central bank have cut their 2013 growth forecast for the second straight week to 2.93 percent, below the central bank’s forecast of 3.1 percent.

“The decision was necessary due to inflation levels, and even with the weak economy,” Fernando Fix, chief economist at Votorantim Asset Management, said by phone from Sao Paulo. “Inflation is at high levels, and represents one of the main reasons behind low growth.” Fix expects the Selic to end the year at 8.75 percent.

To contact the reporters on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net;

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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