G-20’s Only Rate Boost to Go On as Prices Rise Amid Brazil Slump

Brazil’s central bank signaled it will raise interest rates for a sixth time in June as Latin America’s largest economy attempts to tame runaway inflation.

The bank’s board on Wednesday increased the key rate by a half-point to 13.25 percent, the fifth boost since October, making Brazil the only Group of 20 nation to raise rates in 2015. Language from the board’s statement matched that of the previous two communiques, indicating policy makers will lift the Selic again in June, said economist John Welch.

“Only if we see a marked improvement in consumer prices in coming weeks will they back down from 50 basis points by the time of the next meeting,” Welch, a strategist at Canadian Imperial Bank of Commerce, said by telephone. “Growth doesn’t matter. That’s not the way inflation dynamics work in Brazil.”

Central bank President Alexandre Tombini has pledged to bring inflation next year down to 4.5 percent, a target analysts forecast he will miss. A weaker currency and increases to government-regulated prices, such as electricity and fuel, are offsetting the impact of a drop in demand.

Swaps on the contract due in January 2016 fell 0.02 percentage point to 13.48 percent before Wednesday’s rate increase, indicating traders forecast an increase of 25 basis points to 50 basis points at the June meeting. Solange Srour, chief economist at ARX Investimentos, said by phone after the decision that the short-term swaps may rise Thursday.

Inflation Quickened

The monetary tightening comes after inflation quickened to 8.22 percent in mid-April, the highest annual 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.

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.

Economists in the survey also see Brazil’s 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.

Currency Slumped

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

“Probably the most important factor that will determine the next rate decision is the currency,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone, adding that the odds of a half-point increase in June will rise if the real weakens beyond 3.35. “If I had to give a probability, I’d say there’s a 60 percent chance of a 25 basis-point hike.”

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 to target.

“The central bank is showing itself to be quite committed,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone after the decision. “It’s clearly doing the work to regain the credibility it lost in recent years.”

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