Brazil Indicates End of World’s Longest Rate Increase Cycle

Brazil has adopted a “sizable” monetary response to tame above-target inflation, central bank Director Luiz Awazu Pereira said, signaling policy makers will keep the benchmark rate unchanged this month.

The most traded swap rate contracts fell in Sao Paulo as investors increased bets policy makers will keep interest rates unchanged for the first time since March 2013 when they meet May 28. The central bank has raised the Selic rate by 375 basis points to 11 percent from a record-low 7.25 percent since April 2013. That’s the longest tightening cycle among major economies in the past year.

“We took early action and sizable action on monetary policy to address domestic inflationary pressure,” Awazu said today in an event organized by The Economist in Paris.

President Dilma Rousseff’s administration is struggling to steer the world’s second-largest emerging market out of a period of slow growth and above-target inflation. The central bank has lifted the key rate in nine straight meetings to tame consumer price increases fanned by a weaker real and rising food prices.

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 10.98 percent at 10:23 a.m. local time. The real gained 0.2 percent to 2.2106 per U.S. dollar.

Awazu’s “speech was clear and indicates the central bank took sufficient measures to address short-term inflation,” Juliano Ferreira, Icap Brasil strategist, said by phone. “They want to anchor expectations that the tightening cycle will stop now.”

End of Cycle

Awazu, who oversees international affairs and financial regulation, said food prices shocks are subsiding and reiterated monetary policy acts with lags.

“The monetary policy adjustment already implemented was intense and the effects can still not be fully seen in the economy,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, said by phone. “These signals indicate the end of rate increases.”

Deutsche Bank said in a report today that it is now expecting no change in the key rate at the central bank’s May monetary policy meeting, as opposed to its previous forecast of a 25 basis-point increase. Higher administered prices will oblige policy makers to start lifting borrowing costs again next year, the report said.

Consumer prices in April increased 0.67 percent from the the month before, pushing up the annual inflation rate to 6.28 percent. Brazil’s annual inflation has remained above the midpoint of the 2.5 percent to 6.5 percent target range throughout Rousseff’s tenure. She is eligible to run for re-election in October.

Faster Inflation

Economists in a weekly central bank survey estimate consumer inflation will accelerate to 6.39 percent by December, according to the study published on May 12. Consumer price increases have a 40 percent chance of breaching the 6.5 percent ceiling this year, according to central bank forecasts.

The analysts polled by the central bank also expect Brazil’s economic growth to slow to 1.69 percent this year from 2.3 percent in 2013. Brazil has expanded below the Latin American average for the past three years, according to data compiled by Bloomberg.

Rousseff pledged on April 30 to alter the income tax table to raise take-home pay and has boosted by 10 percent the value of cash transfers in the Bolsa Familia social welfare program. Finance Minister Guido Mantega last week in a televised interview urged private banks to increase lending to help boost the economy.

Retail sales in February expanded 0.2 percent from the prior month after climbing 0.4 percent in January. Consumer confidence in Brazil as measured in April by the Getulio Vargas Foundation fell to the lowest level since May 2009.

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