Brazil’s central bank raised its benchmark rate for the first time since July 2011, as policy makers seek to slow inflation levels jeopardizing an economic recovery.
The bank’s board, led by President Alexandre Tombini, voted 6-to-2 to increase the Selic rate 25 basis points to 7.50 percent from a record low, matching the median forecast from 58 economists surveyed by Bloomberg.
Policy makers said that “the high level of inflation” and “resilience of inflation” required a response, which was tempered by the central bank’s recognition that “external uncertainties” also required “that monetary policy be managed with caution,” according to the board’s statement posted on Banco Central do Brasil’s website.
President Dilma Rousseff’s government is facing renewed pressure to contain consumer prices after annual inflation in March breached the central bank’s target range for the first time since November 2011. Rising prices are sapping purchasing power and eroding demand even after officials cut taxes on consumer goods and lowered the Selic to 7.25 percent in October. Retail sales in February fell for the second time in three months.
“Inflation has clearly become detrimental to growth,” Gustavo Rangel, chief Latin America economist at ING Bank NV in London, said in a telephone interview before today’s decision. “Both the retail figures and investors’ confidence levels are signaling that inflation is a big concern.”
Swap rates on the contract maturing in July 2013, the most traded in Sao Paulo today, was unchanged at 7.63 percent. The real weakened 0.7 percent to 2.0006 per dollar.
Brazil will tackle inflation systematically, Rousseff said April 16, warning that price increases eat into income and profits. Policy makers will not tolerate inflation, Tombini said April 12.
Annual inflation in the world’s second-largest emerging market accelerated to 6.59 percent in March from 6.31 percent a month earlier. That compares with annualized March price increases of 4.25 percent in Mexico and 1.5 percent in Chile.
Policy makers estimate there is a 25 percent chance price increases will exceed the upper limit of the target range this year even with interest rates at 8 percent, according to the bank’s quarterly inflation report published in March. Brazil’s central bank targets inflation of 4.5 percent, plus or minus two percentage points.
“Inflation expectations have deteriorated by more than a reasonable amount,” Jose Francisco de Lima Goncalves, chief economist at Banco Fator, said in a telephone interview from Sao Paulo before today’s meeting. “The bank is in a tough situation where it’s practically mandatory to respond.”
Both consumer and investor perceptions of inflation have worsened, and their views may be driving down consumption, according to Carlos Kawall, chief economist at Banco Safra SA.
After falling 3.6 percent last year, partly due to increased competition from abroad, industrial production in February plunged the most since December 2008. Retail sales dropped 0.4 percent in February, falling short of analysts’ forecast of a 1.5 percent gain.
The deterioration in output and sales may be spilling over to stock prices of major retailers. The MSCI index of Brazilian consumer-discretionary stocks, which include Lojas Americanas, Lojas Renner SA and Cia. Hering, has fallen 6.8 percent in 2013 after jumping 25 percent in the last six months of 2012. The benchmark Bovespa index is down 13.2 percent this year.
“Elevated inflation affects business confidence,” Kawall said in a telephone interview before today’s announcement. “There is no trade-off whereby more tolerance of inflation would bring more growth. This is especially true when we consider that growth has to come from investment.”
Growth in Latin America’s largest economy will rebound from 0.9 percent in 2012 to at least 3 percent this year as investment accelerates, Finance Minister Guido Mantega said last month. Brazil’s inflation is declining, and growth won’t generate price increases, Mantega said April 12.
Economists following Brazil have ratcheted down their growth forecast to 3 percent in the latest weekly central bank survey from a high of 4.5 percent on June 1. Their inflation forecast for 2013 has risen to 5.68 percent from 5.60 percent during the same period, the survey said.
The central bank must work to regain credibility, as investors are losing confidence in the government’s ability to conduct policy, according to ING Bank’s Rangel.
“We have a stagflation movement in Brazil, whereby you have an increase in long-term inflation expectations and a decrease in long-term expectations for growth,” Rangel said. “That’s a horrible situation for a country.”