Brazil Slows Pace of Interest Rate Increases to Spare Growth

Brazil’s central bank halved the pace of key rate increases, signaling the end of its tightening cycle is near, as policy makers struggle to tame inflation without further jeopardizing growth.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate to 10.75 percent from 10.50 percent, as forecast by 44 of 61 economists surveyed by Bloomberg. Sixteen analysts expected the seventh straight half-point boost, while one forecast no change.

“The central bank is saying we’re getting closer to the end of the cycle but aren’t quite there yet,” John Welch, macro strategist at Canadian Imperial Bank of Commerce, said by telephone from Toronto. The central bank will raise by another quarter point to safeguard for a likely increase in government-controlled prices, such as automotive fuel.

The world’s second-largest emerging market is caught between above-target inflation and weakening economic activity. Prospects of a credit rating downgrade led policy makers to rein in spending that stoked consumer prices and caused the fiscal deficit to swell. Economists have cut 2014 growth forecasts by more than two percentage points, as a drop in confidence complicates government efforts to spur investment.

The decision sought to give “continuation to the adjustment of the benchmark rate that began in the April 2013 meeting,” policy makers said in their statement posted on the central bank’s website.

The benchmark rate is now at the same level as when President Dilma Rousseff took office in 2011.

’Points Down’

Swap rates on the contract due in April 2014, the most traded in Sao Paulo today, rose one basis point, or 0.01 percentage point, to 10.60 percent. The real weakened 0.4 percent to 2.3500 per U.S. dollar.

Brazil’s central bank in the last eight meetings has lifted the key rate by 350 basis points from a record 7.25 percent. Brazil has the highest benchmark borrowing costs of major rate-setting nations in Latin America, according to data compiled by Bloomberg.

Confidence levels have waned as officials have tightened monetary policy. Industrial sector sentiment in February fell to the lowest level since July, while consumer confidence the same month plunged to the lowest since May 2009.

Economists in a weekly central bank survey this week cut their 2014 growth estimates to 1.67 percent. That’s the lowest level ever, down more than two percentage points from expectations of a 3.80 percent expansion from a year ago.

Output, GDP

Brazil’s industrial output in December contracted 3.5 percent from the previous month, the most in five years, as capital goods output plunged 11.6 percent.

Retail sales in the same month fell for the first time since February on declines from furniture to vehicles and auto parts.

“Growth is a lot weaker than anyone was expecting,” Tony Volpon, the head of research for the Americas at Nomura Holdings Inc., said by phone before the bank’s announcement. “Every single data point we get points down. At some point, the central bank has to incorporate that into its decision-making.”

Tomorrow, the national statistics agency reports on fourth-quarter gross domestic product data. The median estimate from 49 economists surveyed by Bloomberg is for quarter-on-quarter growth of 0.3 percent.

Bimbo, Budget

Mexican baking products company Bimbo (BIMBOA) is among companies facing challenges in Brazil. While Bimbo is seeing an improvement in Latin America sales in 2014, it’s having difficulty expanding in Brazil, CEO Daniel Servitje said in a Feb. 21 earnings conference all.

Brazil will cut 44 billion reais ($18.7 billion) from this year’s budget, the Finance Ministry said in a Feb. 20 statement. The spending reduction will slow inflation and cut debt while helping monetary policy be “less severe,” Finance Minister Guido Mantega told reporters in Brasilia the same day.

Following today’s rate decision, Welch said that last week’s budget cuts were insufficient to make much of a difference on inflation expectations.

Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service in October lowered its outlook to stable from positive, citing deteriorating debt and investment ratios and evidence of slow growth. Brazil’s Baa2 rating from Moody’s and equivalent BBB ranking from S&P are the second-lowest investment grades.

Brazil’s consumer prices as measured by the IPCA index decelerated to 5.59 percent in January from 5.91 percent the month before. While inflation was still above the central bank’s 4.5 percent target, it is down from a 2013 peak of 6.7 percent in June.

‘Long Time’

January’s inflation reading lessened pressure on policy makers to maintain the pace of rate boosts, Enestor Dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, said before today’s announcement.

Brazil’s real, which fueled inflationary pressure by tumbling 13 percent against the U.S. dollar in 2013, has gained 2 percent in the past month. That increase is the third-largest among 16 major currencies tracked by Bloomberg.

Policy makers have been successful in slowing consumer prices, Tombini said Feb. 18. The full impact of the increases to the benchmark Selic rate hasn’t materialized yet, Tombini said.

“Tightening has been going on for a long time,” Banco Fator’s chief economist, Jose Francisco de Lima Goncalves, said before today’s decision. “The increase has been very large. You can’t expect that it has an impact from one day to the next.”

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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