Brazil’s central bank signaled the deepest recession in a quarter century won’t stop it from extending the only interest-rate increase among major world economies.
Policy makers raised benchmark-borrowing costs by 0.50 percentage point for a fifth-straight meeting Wednesday to 13.75 percent, matching the estimates of 55 of 56 analysts surveyed by Bloomberg. Language from the board’s statement matched that of the previous three communiques.
Economists and traders forecast central bank President Alexandre Tombini will fail to fulfill his pledge of bringing the fastest inflation in 11 years to the 4.5 percent target next year. Policy makers are trying to persuade investors that they will do what it takes to rein in consumer prices as unemployment surges and the economy contracts.
“The monetary authority is clearly trying to bring the inflation forecast to the mid-point of the target by promoting a significant slowdown of the economy,” Andre Perfeito, chief economist at Sao Paulo-based brokerage Gradual Cctvm SA, said by telephone. “The fact they repeated the statement shows they will keep the same rhythm.”
Swap rates on the contract maturing in January 2017 have increased 0.26 percentage point this month to 13.58 percent on estimates that Tombini will continue to lift borrowing costs. Perfeito expects swap rates to rise further as traders increase bets the key rate, known as the Selic, will reach 14.25 percent in July.
Ukraine, Belarus and Moldova are the only other nations in a group of 48 economies tracked by Bloomberg that are increasing rates this year. China, India and Russia, which together with Brazil form the BRIC group, have reduced borrowing costs to revive growth.
“Brazil’s tightening has already gone far enough,” Carlos Kawall, chief economist at Banco Safra, said by phone. “It doesn’t seem credible that the central bank will work to bring inflation back to 4.5 percent in 2016 because it would mean lifting the Selic to 16 percent or 17 percent.”
Even with the key rate rising, annual inflation has accelerated every month this year. Analysts surveyed by the central bank forecast it will close 2015 at 8.39 percent, exceeding the upper limit of the 2.5 percent to 6.5 percent target range for the first time since 2003.
They see inflation slowing to 5.5 percent by December 2016 following an economic contraction of 1.3 percent this year. Tombini will start cutting rates in 2016 to stimulate a rebound, according to the analysts.
A person close to the government’s economic team said last month that policy makers hadn’t yet decided on next year’s rates, adding that the central bank will wait for analysts to cut their inflation outlook to 4.5 percent before considering whether to reverse monetary policy.
“The central bank is trying to say: We are committed to the mid-point of the target,” Roberto Padovani, chief economist at Sao Paulo-based brokerage Votorantim Ctvm Ltda, said by phone. “The questions now are whether we hit the target in 2016 and how big the recession will be.”