Brazil Signals Key Rate Hold Until Next Government Sworn In

Brazil’s central bank signaled borrowing costs will remain unchanged until at least the end of the current administration in December as policy makers are trapped between a recession and above-target inflation.

The bank’s board, led by President Alexandre Tombini, yesterday held the benchmark rate at 11 percent for the third straight meeting, removing the phrase “at this moment” from the communique in an indication the key rate will remain on hold, Andre Perfeito, chief economist at Gradual Investimentos, said. All except one of the 54 analysts surveyed by Bloomberg correctly forecast the decision.

President Dilma Rousseff is trailing in polls as inflation near the ceiling of the target range has helped to erode consumer and business confidence. Yesterday’s monetary policy decision was the last before Brazilians select their leader in October. Marina Silva, who pledges to give the central bank president autonomy to bring inflation to the 4.5 percent target, would beat the incumbent in a runoff, polls show.

“They’re leaving this problem to the next board of the central bank and also the next president of Brazil,” Perfeito said by telephone from Sao Paulo. “Until the end of this administration it will be 11 percent. They won’t change that.”

Swap rates on the contract due in January 2017 rose nine basis points, or 0.09 percentage point, to 11.23 percent at 12:09 p.m. local time. The real weakened 0.1 percent to 2.2394 per U.S. dollar.

Economy Contracted

Brazil’s economy contracted 0.6 percent in the second quarter after shrinking a revised 0.2 percent during the first three months of the year, the national statistics agency said Aug. 29. Investment dropped 5.3 percent on the quarter, while services and industry also shrank.

Analysts surveyed by the central bank on the same day cut their growth forecasts for this year and next to 0.52 percent and 1.10 percent, respectively. Gross domestic product expanded 2.5 percent last year and 7.5 percent in 2010, the highest in more than two decades.

Consumer confidence as measured by the Getulio Vargas Foundation, a Brazilian research institute, fell to more than a five-year low in August while data published by Brazil’s industry confederation showed industrial confidence in July reached its lowest point in more than a decade.

Rio de Janeiro-based Mills Estruturas e Servicios SA, which provides scaffolding and concrete forms for Brazil’s oil, shipbuilding and construction industries, is among companies that have seen sales fall short of expectations. The firm’s shares tumbled to a two-year low Aug. 7 after its second-quarter profits trailed estimates.

Spur Lending

Demand has eased despite billions of dollars in tax cuts on items from furniture to automobiles. The central bank twice in the last six weeks lowered capital requirements to spur lending, saying the measures would increase availability of credit without spurring consumer prices.

Current monetary policy will bring inflation toward target, Tombini told an Aug. 5 Senate hearing in Brasilia. Policy makers raised the key rate by 3.75 percentage points over nine straight meetings through April.

While annual inflation in mid-August eased to 6.49 percent from 6.51 percent a month earlier, it has exceeded the mid-point of the target range for 48 straight months. Brazil targets inflation of 4.5 percent, plus or minus two percentage points.

“Inflation is still very high and disseminated,” Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist, said by phone last night. “Delivering low and stable inflation is the best contribution the central bank can give for growth to accelerate.”

Fixed Term

Silva, a former senator and environment minister, pledges to grant the central bank president a fixed term as quickly as possible, with the aim of increasing the institution’s independence to take measures needed to slow inflation.

Banco Central do Brasil isn’t independent by law and the president has authority to fire its chief. Rousseff in a Sept. 1 televised presidential debate said central bank autonomy would make it difficult to regulate the financial system.

The Ibovespa (IBOV) rose 4.9 percent last week as three public opinion polls showed Silva would win the election in an Oct. 26 runoff vote. The stock index has fallen 10.8 percent since Rousseff took office in January 2011.

Ibope and Datafolha polls published last night, which have a margin of error of plus or minus two percentage points, each show Silva winning the second round by seven percentage points. Neither candidate has enough support in the polls to avoid a runoff, which occurs when the leader in the first round fails to garner more votes than all others put together.

Policy makers are scheduled to meet twice more on the interest rate -- Oct. 28-29 and Dec. 2-3 -- before either Rousseff or a new president enters office in January.

Yesterday’s central bank statement “reinforces to a greater extent the message that the interest rate indeed should remain stable at least through the end of the year,” Thais Zara, chief economist at Rosenberg Associados, said by phone last night. “It will be very difficult for any new factor to make them change their strategy.”

To contact the reporters on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net; Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Randall Woods, Robert Jameson

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