(Updates with comments from Itau Unibanco in fifth paragraph.)
By Matthew Malinowski and Raymond Colitt
Oct. 17 (Bloomberg) -- Brazil’s central bank said its current pace of interest rate increases remains appropriate to ensure inflation slows, prompting Latin America’s biggest bank to forecast the benchmark rate will go to 10 percent next month.
Policy makers, led by President Alexandre Tombini, voted unanimously last week to raise the benchmark Selic rate to 9.5 percent from 9 percent, marking the fourth straight 50 basis-point, or 0.50 percentage point, increase. The central bank estimates inflation will remain above its 4.5 percent target through the third quarter of 2015 in both its reference and market scenarios, officials said in the minutes to their Oct. 8-9 meeting published today.
Policy makers “consider adequate the continuity of the rhythm of adjustment of monetary conditions now under way,” the bank said in the minutes.
Itau Unibanco Holding SA today scrapped its estimate for a final 25-point Selic increase and joined in forecasting that central bankers will raise the rate to 10 percent in November, as the biggest depreciation amid major currencies over the past six months threatens to stoke above-target inflation. Higher living costs have sapped consumer and business confidence, forcing Tombini to implement the largest tightening cycle among major economies even as growth sputters.
“The Copom remains uncomfortable with this resilience” in inflation, said Itau, Latin America’s biggest bank by market value, in a research note signed by chief economist Ilan Goldfajn. “The minutes maintained the tone of recent communication, signaling the pace of interest rate hikes will continue.”
Other banks including Barclays Plc, Goldman Sachs and Banco Espirito Santo de Investimento today also changed their forecasts for November’s monetary policy meeting to a 50-point jump from 25 points.
“The central bank is signaling intentions for a 50-point increase in November,” Jankiel Santos, chief economist at Banco Espirito Santo, said by phone. “When the bank’s inflation outlook is incompatible with its goal, it has to act.”
Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, rose six basis points, or 0.06 percentage point, to 10.44 percent at 12:46 p.m. local time. The real strengthened 0.9 percent to 2.1616 per dollar.
Brazil since April has raised borrowing costs by 225 basis points, or 2.25 percentage points, from a historic low of 7.25 percent. That’s the biggest increase among 49 world economies tracked by Bloomberg this year, followed by Indonesia with a 1.5 percentage-point increase.
Annual inflation in September eased to 5.86 percent, the slowest since December. The central bank is committed to bringing inflation to its target, and seeks slower consumer price increases next year compared with 2013, Tombini told reporters in Washington on Oct. 11.
While the real surged 12.7 percent since the central bank on Aug. 22 announced a $60 billion intervention plan, the currency is still down 7.5 percent in the past six months, the worst performance among 16 major currencies tracked by Bloomberg. A weaker currency threatens to fan inflation by making the price of imported goods more expensive.
Brazil’s retail sales in August topped economists’ forecasts for the second straight month, while industrial output in the same period unexpectedly stalled on slower consumer goods production.
Brazil’s gross domestic product was unchanged or slightly positive in the third quarter after accelerating more than analysts expected in the second quarter, according to two government officials familiar with estimates who asked not to be named because the forecasts aren’t public.
The central bank last month increased its 2014 year-end inflation estimate to 5.7 percent from 5.2 percent, basing its call on a year-end Selic of 9.75 percent. Policy makers reduced their 2013 economic growth forecast to 2.5 percent from 2.7 percent.
Economists surveyed in a weekly central bank survey have cut their 2014 growth expectations to 2.20 percent from a high of 3.80 percent in February, while boosting inflation forecasts for next year to 5.95 percent from 5.50 percent over the same period.