JPMorgan Not Buying Traders’ 14% Rate Call as Brazil GDP Sinks

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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

Some of the largest banks in the Americas say traders are wrong in betting Brazil’s policy makers will sustain their pace of benchmark interest rate increases amid the worst economic contraction in a quarter-century.

Economists at JPMorgan Chase & Co., Itau Unibanco Holding SA and Banco Bradesco SA forecast the central bank will lift borrowing costs by a quarter-point to 13.5 percent in June before ending its tightening cycle. Traders raised bets on the rate reaching 14 percent this year after policy makers said last week that gains achieved in the fight against inflation haven’t been enough.

While economists surveyed by the central bank forecast inflation will close the year nearly 4 percentage points above target, they are confident the recession will bring it closer next year. Traders may pull back on their bets after data coming out in the next month including cost-of-living increases and unemployment help confirm analyst forecasts, said Octavio de Barros, chief economist at Bradesco.

“More than a dozen hawkish economists agree with me that the cycle should already have been interrupted,” he said by telephone from Sao Paulo. “We all think the tightening cycle already went very far. Now the economy is really adjusting and inflation will naturally converge to the center of the target.”

Worst Performance

De Barros sees a 60 percent probability the central bank will raise the benchmark rate by 0.25 percentage point at its June meeting.

Analysts in this week’s central bank survey forecast gross domestic product will contract 1.2 percent in 2015, which would be the worst performance since 1990. The economy will rebound in 2016 as inflation moderates to 5.5 percent from 8.3 percent this year, according to the survey.

Central bank President Alexandre Tombini pledges to slow inflation even more, bringing it to the midpoint of the 2.5 percent to 6.5 percent target range by December 2016. To achieve that goal, he has boosted borrowing costs by 0.5 percentage point for four straight meetings, to 13.25 percent.

The central bank board indicated in the minutes of its last gathering that it isn’t finished, saying it needs to do more to combat price increases. Swap rates on the contract expiring in January 2017 surged 0.13 percentage point the day it was published to 13.63 percent, the highest in more than a month.

Economists “are minimizing the central bank’s more hawkish change in tone,” Luiz Eduardo Portella, a trader and partner at Modal Asset Management, said by phone. “The central bank wants to win the war against expectations, and it is trying to give clear signals.”

‘Sharp Deterioration’

Brazil’s real weakened 0.5 percent Wednesday to 3.0361 per dollar as of 2:43 p.m. in New York.

The central bank press office didn’t respond to an e-mail seeking comment on its outlook for rates. A person close to the government’s economic team, who asked not to be named because the information isn’t public, said last week that Brazil’s central bank will wait for analysts to cut their inflation outlook to 4.5 percent before considering whether to reverse monetary policy.

Signals aside, Itau and JPMorgan expect policy makers to focus on economic data such as rising unemployment in making their next decision. The gathering, scheduled for June 2-3, will take place during the quarter that will be the worst of the year, Itau wrote in a note to investors on May 11. JPMorgan is the second-largest U.S. bank by market value and Itau is Latin America’s biggest.

“We are expecting to see a sharp deterioration in activity numbers,” Cassiana Fernandez, JPMorgan’s chief economist for Brazil, said by phone. “The labor market is already weakening a lot and will continue to do so,” she said. “That should be able to contain wage pressures going forward, and this would give room to the central bank to reduce the pace of tightening.”

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