Brazil Raises Key Rate for Fifth Time as Inflation Quickens

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Brazil's Central Bank President Alexandre Tombini
Alexandre Tombini, President of the central bank of Brazil, attends the International Monetary Fundand World Bank Group Spring Meetings in Washington, D.C. on April 17. Photographer: Andrew Harrer/Bloomberg

Brazil’s central bank increased the benchmark interest rate for the fifth consecutive meeting to bring surging inflation back to target by the end of next year.

The bank’s board, led by its President Alexandre Tombini, in a unanimous vote raised the key rate by a half-point to 13.25 percent Wednesday, the highest since January 2009. The statement accompanying the decision uses the same language as the prior communique. The increase was forecast by 53 of 61 economists surveyed by Bloomberg. The remainder expected a quarter-point boost.

Analysts estimate Tombini will fail to meet his pledge of slowing inflation to the 4.5 percent goal by the end of 2016 even as they forecast Brazil will slip into its deepest recession in a quarter-century this year. A weaker currency and increases to government-regulated prices, such as electricity and fuel, have pressured inflation since the start of the year.

“The central bank is looking at an economy that is decelerating strongly, but with inflation remaining high throughout 2016,” Roberto Padovani, the chief economist at Votorantim Ctvm and the top key-rate forecaster among analysts surveyed by Bloomberg, said by telephone before the decision. “In the short term there is need to focus on inflation.”

Inflation quickened to 8.22 percent in mid-April from 7.9 percent a month earlier, the highest yearly rate in more than a decade. Analysts surveyed by the central bank estimate consumer prices will surge 8.25 percent in 2015, exceeding the ceiling of the target range for the first time since 2003.

‘Inflation Outlook’

Cost-of-living increases will slow to 5.6 percent in 2016, the survey shows. Policy makers target inflation of 4.5 percent, plus or minus 2 percentage points.

Wednesday’s decision took into account “the macroeconomic scenario and the inflation outlook,” according to the central bank statement.

Economists in the survey see Latin America’s biggest economy shrinking 1.1 percent in 2015, which would be the worst performance since a 4.2 percent contraction in 1990. Growth in Brazil has trailed the Latin American average for the last four years.

In a bid to boost lagging investor confidence, Finance Minister Joaquim Levy vows to shore up government accounts through tax increases and budget cuts. His efforts paid off in part after Standard & Poor’s in March kept Brazil’s sovereign-credit rating unchanged at investment grade.

Congress Divided

Levy, who joined President Dilma Rousseff’s administration in January, is trying to convince a divided Congress to approve the belt tightening measures. He told lawmakers Wednesday that the threat of a downgrade would “return fast” if the country fails to shrink its budget deficit.

The real declined 0.8 percent to 2.9613 per U.S. dollar after the central government on Wednesday posted a smaller-than-forecast surplus in March that excludes payments on interest. The real has weakened 25 percent in the last year, the worst performance among 16 major currencies tracked by Bloomberg.

“They still have a long way to go on the fiscal side, but we can say that they are going in the right direction,” Thais Zara, chief economist at Rosenberg Consultores Associados, said by phone.

While Levy’s tax increases are putting temporary pressure on consumer prices, Tombini told members of Congress in March that a more restrictive fiscal policy eventually would help the central bank in its fight against inflation. Tombini said a month later that policy makers in the meantime would remain vigilant as they try to slow price increases toward 4.5 percent.

“The central bank needs to keep raising rates for now to regain credibility that has been hampered in recent years by a failure to bring inflation toward the center of the target,” Newton Rosa, chief economist at Sul America Investimentos Dtvm SA, said by phone.

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