Brazil Signals Inflation Will Extend World’s Biggest Rate Rise

Photographer: Matthew Lloyd/Bloomberg

The central bank’s board, led by President Alexandre Tombini, yesterday lifted the benchmark interest rate to 10.5 percent from 10 percent, marking the sixth straight half-percentage point increase. Close

The central bank’s board, led by President Alexandre Tombini, yesterday lifted the... Read More

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Photographer: Matthew Lloyd/Bloomberg

The central bank’s board, led by President Alexandre Tombini, yesterday lifted the benchmark interest rate to 10.5 percent from 10 percent, marking the sixth straight half-percentage point increase.

Brazil’s central bank signaled it will extend the world’s biggest interest rate increase after last year’s surge in consumer prices made slowing inflation a greater concern to policy makers than reviving economic growth.

The bank’s board, led by President Alexandre Tombini, yesterday lifted the benchmark interest rate to 10.5 percent from 10 percent, marking the sixth straight half-percentage point increase. The statement accompanying the unanimous decision said the move extended a tightening cycle started in April 2013, signaling borrowing costs will rise again in February, said Fernando Fix, chief economist at Votorantim Asset Management.

Dilma Rousseff, who is up for re-election in October, is battling above-target inflation as she risks delivering the slowest economic growth of any Brazilian president since Fernando Collor, who was forced to resign over corruption charges in 1992. Her popularity last year fell to the lowest in her term, as rising prices eroded consumer and business confidence and hindered growth.

“Today the biggest concern is inflation, even in terms of the possible electoral losses it may bring,” Fix said by phone after yesterday’s decision. “Brazil must anchor inflation before it can have a more sustainable growth.”

‘This Moment’

Policy makers in 2013 increased the Selic interest rate by 2.75 percentage points from a record-low 7.25 percent, the most among 49 major economies tracked by Bloomberg.

The bank board said in a statement accompanying yesterday’s move it was raising the Selic by 0.50 percentage point “at this moment,” suggesting it may start slowing the pace of increases, according to Newton Rosa, chief economist at Sul America Investimentos in Sao Paulo. Policy makers hadn’t included that language in the previous communique.

“It means the 0.5 percentage point increase is adequate for now,” he said by phone. “In the next meeting, they could raise a quarter-point or leave the Selic at 10.5 percent. They left it open.”

Analysts polled weekly by the central bank estimate the Selic will reach 11.5 percent by the end of 2015 after inflation accelerates to 6 percent in 2014. Economic growth will moderate this year from last, according to the roughly 100 analysts surveyed by the institution.

Gross domestic product in the third quarter contracted for the first time since 2009 even as Rousseff’s government cut taxes to boost consumption and production. Retail sales in October expanded at the slowest pace in seven months, while the economy in November probably failed to grow, according to the median estimate of 28 economists surveyed by Bloomberg.

Inflation, Swaps

Annual inflation in December quickened to 5.91 percent, missing the official target of 4.5 percent for the 40th consecutive month and exceeding all other major Latin American economies except Argentina and Venezuela.

Rates on swap contracts due January 2015 rose the most in almost eight weeks on Jan. 13, one business day after the statistics agency published the December price report. Swaps jumped 0.16 percentage point before yesterday’s decision from the end of last year as traders changed bets to a 10.5 percent Selic at this month’s meeting from 10.25 percent.

“They made the right decision,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil in Sao Paulo, said about the rate increase. “The central bank is showing it is focused on inflation. It’s a positive step to prevent inflation expectations from rising more.”

One-year breakeven inflation, a measure of consumer price estimates based on the gap in yields between inflation-linked government bonds and fixed-rate debt, has increased 0.04 percentage point to 6.82 percent since the start of the year.

Living Costs

Family and business sentiment has not improved in the face of higher living costs. Consumer confidence as measured by the Fundacao Getulio Vargas fell in December to its lowest level since July, while industrial confidence was lower in December than when policy makers started raising rates in April.

December’s rise in consumer prices surpassed estimates made by 34 analysts surveyed by Bloomberg and surprised Tombini, who said Oct. 11 inflation rates would end 2013 below the previous year’s 5.84 percent. He blamed the “resistance in inflation” on a weaker currency as well as pressure from the labor market and transportation in a statement published Jan. 10.

Rising bus prices in June sparked the biggest street protests in two decades and led to a decline in the Rousseff administration’s popularity. More than a million Brazilians participated in the movement that grew to encompass a range of issues from government corruption to inadequate public services.

Approval Rating

The government’s approval rating sank to a low of 31 percent in July before rebounding to 43 percent in a survey of 2,002 people from Nov. 23 to Dec. 2. The National Industry Confederation published the poll, which has a margin of error of 2 percentage points. Only 31 percent of those polled approved of government measures to contain consumer prices.

Policy makers are “giving more importance to inflation than to slower growth,” Marcelo Salomon, co-head for Latin America economics at Barclays Plc in New York, said by phone. “The central bank is playing by the book. The big message of 2013 is the high political cost of inflation.”

To contact the reporters on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net; Arnaldo Galvao in Brasilia Newsroom at agalvao1@bloomberg.net

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

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