Policy makers led by central bank President Alexandre Tombini voted unanimously last week to hold the benchmark Selic rate at at 11 percent, halting the world’s longest tightening cycle after nine previous boosts.
“The expansion of domestic activity tends to be less intense in comparison with 2013,” policy makers said in the minutes of their May 27-28 meeting published today. “The committee assesses that the effects on inflation from the elevation of the Selic rate, in part, have yet to materialize.”
President Dilma Rousseff’s administration is facing the dual challenge of taming above-target inflation without smothering economic activity. Brazil’s first-quarter growth slowed from the previous three months on reduced family consumption and the biggest investment drop in two years. A cooling economy means policy makers will continue in a holding pattern until at least general elections in October, according to Tony Volpon, head of Americas research for Nomura Holdings Inc.
“They are telling us the economy is much weaker than we thought it would be, and confidence is much lower,” Volpon said in a telephone interview from New York. “They are out of the game for now.”
Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point to 10.81 at 2:12 p.m. local time. The real strengthened by 0.5 percent to 2.2684 per U.S. dollar.
The central bank held the key rate unchanged after boosting borrowing costs by 375 basis points in the year through April. Colombia is the only other major economy in Latin America that has lifted its key rate this year to combat price increases.
Brazil’s inflation as measured by the IPCA index decelerated to 0.38 percent in May from 0.67 percent the month prior, while annual price increases rose to 6.29 percent, according to the median estimate of a Bloomberg survey. The national statistics agency will publish the official inflation figures tomorrow.
Today’s minutes show that policy makers are less concerned with inflationary pressure, Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo.
Inflation is slowing and consumer prices are under control, Rousseff told reporters in Brasilia on June 3. The central bank targets annual inflation of 4.5 percent, plus or minus two percentage points.
Having a lower real interest rate is important to stimulate the country’s development, Finance Minister Guido Mantega said today in Brasilia. Brazil’s real interest rate stands at 4.72 percent, compared to 5.12 percent at the end of 2010 shortly before Rousseff took office.
Brazil’s economy expanded 0.2 percent in the first quarter, half the pace of the revised growth figure recorded in the last three months of 2013, the national statistics agency said on May 30. Investment fell 2.1 percent on the quarter, while family consumption in the same period slipped 0.1 percent.
There are signs uneven economic activity persisted into the start of the second quarter. Industrial output in April contracted 0.3 percent from March, the second straight month-on-month decline, and fell 5.8 percent from the year before.
Statistics published by the National Industry Confederation showed industry sentiment in May at the lowest since January 2009. Consumer confidence, as measured by the Getulio Vargas Foundation, fell in the same month to the lowest level in more than five years.
Economists surveyed by the central bank on May 30 cut their 2014 growth forecast to 1.50 percent, the lowest ever. That compares with the central bank estimate of a 2 percent expansion.
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