Brazil Lifts Selic to 9.5% from 9% in World's Longest Streak

Brazil’s central bank raised its main interest rate for a fifth straight time, the longest stretch of increases in the world, as the weakening real hampers efforts to slow inflation.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic to 9.5 percent from 9 percent, as forecast by all 49 economists surveyed by Bloomberg. Policy makers, repeating language used in their August decision, said the increase will ensure slower inflation next year. They have raised borrowing costs by 225 basis points, or 2.25 percentage points, since April.

Officials this year have lifted borrowing costs the most among 49 economies tracked by Bloomberg, as they try to slow inflation that has remained above the 4.5 percent midpoint of the target in the past three years. The real’s decline in the past six months, the biggest amid major currencies, prompted analysts to forecast Tombini will fail to ensure consumer price increases ease next year.

“Inflation is elevated and well above target,” said Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA. “There are still risks from a weaker real, which can pressure inflation in the next few months.”

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose one basis point to 10.09 percent. The real increased 0.2 percent to 2.2073 per dollar.

Persisting Inflation

Consumer prices, as measured by the IPCA index, rose 5.86 percent in September (BZPIIPCY), the national statistics agency said today. It was the slowest annual increase in nine months. The central bank targets inflation at 4.5 percent, plus or minus two percentage points. Monthly inflation quickened to 0.35 percent, the fastest pace in four months.

Persisting inflation in areas such as services and an expansionary fiscal policy mean the consumer price slowdown won’t last, according to John Welch, macro strategist at Canadian Imperial Bank of Commerce.

“We think the latest downdraft is administrative and seasonal,” Welch said by e-mail before the central bank announcement. “The proposed 2014 budget shows further loosening and state and municipal governments have eased on the margin.”

The Brazilian government’s 2014 budget proposal entails spending 1.04 trillion reais, a 12 percent increase from approved expenditures this year. The central bank said last month there is room for the fiscal policy to become neutral.

Pass-Through

Brazil is monitoring currency pass-through and will seek 2014 inflation as close as possible to target, Tombini said in an Oct. 2 interview. There is still work to be done on inflation, the central bank’s director for economic policy, Carlos Hamilton, told reporters two days earlier.

Policy makers started raising rates in April, after holding borrowing costs at a record low from October to April. The increase is 75 basis points more than Indonesia’s, the only other major economy tracked by Bloomberg that has elevated its key rate this year.

The central bank on Aug. 22 said it will offer $3 billion in currency swap and credit lines per week through December in a bid to buoy the real, which had reached a nearly five-year low. While the real has since rebounded by 10.3 percent, it is still down 10.6 percent in the past six months.

The weaker real prompted policy makers last week to raise their 2014 inflation estimate to 5.7 percent from 5.2 percent. Policy makers based their forecast on a year-end Selic at 9.75 percent.

Economic Growth

While Brazil’s second quarter economic growth exceeded expectations, there are signs that economic activity is slowing in the third quarter. Industrial production in August was unchanged after dropping 2.4 percent in July, and economic activity in July fell 0.3 percent.

The International Monetary Fund this week forecast growth will slow in the second half and cut Brazil’s 2014 growth outlook to 2.5 percent from 3.2 percent.

“Growth has leveled off,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said before today’s decision.

Central bank rate increases have not prevented inflation expectations from deteriorating.

Analysts forecast consumer price increases will accelerate to 6 percent in 2014 from 5.8 percent in 2013, according to the median estimate in a Oct. 4 central bank survey. On April 19, two days after the tightening cycle started, economists predicted prices would rise 5.7 percent this year and next.

Traders are betting the central bank will raise the Selic as high as 11.25 percent next year, swap rates show.

“The main problem now isn’t inflation this year, but rather in 2014,” Andre Perfeito, chief economist at Gradual Investimento, said by phone before today’s decision. “The central bank is losing because inflation is remaining elevated.”

To contact the reporter on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net

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

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