Brazil Signals Rate Flexible as Prices Soar and GDP Slows

Brazil’s central bank left its key rate unchanged for a second straight meeting, signaling it will keep its options open as it weighs weaker economic growth against above-target inflation.

The bank’s board yesterday said it decided “at this moment” to hold the benchmark Selic at 11 percent in a statement that was virtually identical to the one it used seven weeks ago to interrupt a yearlong tightening cycle. All 57 economists surveyed by Bloomberg forecast the rate would remain unchanged.

“The central bank left the door open” with their statement, Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by telephone. “There’s a chance inflation could surge and it will have to raise, and there’s a chance slower growth could ease inflation and open a window for cuts.”

Central bank President Alexandre Tombini is struggling to damp persistent inflation without damaging an economy suffering from a drop in consumer confidence, industrial output and investment. Analysts have cut their 2014 growth forecast in half since December while inflation last month breached the central bank’s target range for the first time in a year.

Swap rates on the contract maturing in January 2016 declined eight basis points, or 0.08 percentage point, to 10.97 percent at 9:31 a.m. in Sao Paulo, the lowest level on a closing basis since Oct. 11. The real weakened 0.3 percent to 2.2295 per U.S. dollar.

Lure Billions

President Dilma Rousseff’s government this year said it would increase social spending, make permanent payroll tax cuts in 56 industries and lure billions of dollars in infrastructure investments to spur growth. Finance Minister Guido Mantega said as recently as last month that the economy will gather momentum.

Analysts in a weekly central bank survey indicate that those efforts will fail to revive the economy. They cut their expectations for growth in 2014 to 1.05 percent on July 11, compared with a 2.5 percent expansion last year.

Economists’ growth estimates mirror readings of household and corporate confidence. Industrial sentiment as measured by National Confederation of Industry dropped last month to the lowest level in over a decade, while consumer confidence has hovered near five-year lows.

Gross domestic product grew 0.2 percent during the first quarter, half the pace of the expansion recorded in the final three months of 2013. Growth in agriculture was offset by the biggest contraction in investments in two years.

Sales Slow

Direcional Engenharia SA (DIRR3), a Brazilian homebuilder that sells to low-income families, is one of the companies that has seen sales slow in recent months. Its stock tumbled the most in a year on July 11 after booked sales sank in the second quarter. MRV Engenharia e Participacoes SA, which also targets low-income consumers, fell the same day.

Cutting rates to revive the economy would compromise the central bank’s credibility, signaling it’s targeting growth rather than inflation, Alberto Ramos, the chief Latin American economist at Goldman Sachs Group Inc. in New York, said by telephone after yesterday’s decision.

“My reading is that they may maintain their options open,” he said. “It would be a mistake to cut.”

The central bank lifted the benchmark Selic by 375 basis points in the year through April, giving Brazil the highest borrowing costs among rate-setting nations in the Group of 20.

Target Range

The tightening hasn’t caused a slowdown in annual inflation, which at 6.52 percent last month was the fastest in a year and above the target range of 2.5 percent to 6.5 percent. Consumer prices haven’t been fully affected by the rate increases, the central bank’s Tombini said in the transcript of a July 1 interview posted on the central bank’s website.

“Maintaining the Selic rate is a sign that the central bank is waiting to see the effects of previous rate hikes on prices,” Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said by phone last night.

For Enestor Dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, the central bank does not want its inflation fight to jeopardize the economy.

“That’s the bias that this central bank has,” Dos Santos said by phone before yesterday’s decision. “They pay attention to growth, and not only inflation.”

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 editors responsible for this story: Robert Jameson at rjameson@bloomberg.net; Philip Sanders at psanders@bloomberg.net Philip Sanders

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