Brazil Central Bank Signals Rate Increases to Curb Inflation

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Brazil’s central bank signaled it will continue raising rates as projected inflation remains above the center of its target range in 2016. Swap rates increased.

Consumer prices will surge 9 percent in 2015, slowing to 4.8 percent by the end of 2016, if the benchmark Selic remains at 13.75 percent, according to the reference outlook in the quarterly inflation report published on Wednesday. The previous report in March forecast inflation of 4.9 percent next year.

While inflation expectations are on or close to the 4.5 percent target in the medium and long term, “the inflation expectations for the end of 2016 still show a relevant difference from the target,” the bank said in the report. It repeated language used in the minutes to its last rate decision that “determination and perseverance” are needed.

The central bank is caught between accelerating inflation and an economy that’s poised to record the worst recession in 25 years. As the government tightens spending and raises taxes to restore fiscal discipline, Brazil is the only nation in the Group of 20 to be raising its benchmark interest rate.

“They haven’t shown any sign of wanting to stop or slow the increase of rates,” said Newton Rosa, chief economist at Sao Paulo-based Sul America Investimentos. “Inflation is still very resilient.”

Six Straight

Swap rates on the contract due in January 2017 rose 0.11 percentage point to 13.95 percent at 1:49 p.m. local time as traders bet on continued rate hikes. The real lost 0.5 percent to 3.0907 per U.S. dollar.

Annual inflation sped up to 8.8 percent through mid-June. The central bank said today that efforts to tame price increases are insufficient even after it boosted the benchmark rate six straight times, to 13.75 percent, the highest since 2009.

“The most important message is that the central bank is and will remain vigilant to bring inflation to 4.5 percent by the end of 2016,” the central bank’s economic policy Director Luiz Awazu Pereira told reporters in Brasilia. “We will do whatever is necessary takes to reach the target.”

Analysts surveyed by the bank forecast inflation of 8.97 percent at year-end, which would breach the target range for the first time since 2003. The current range is 2.5 percent to 6.5 percent.

Central bank President Alexandre Tombini has repeatedly vowed to slow inflation to target by the end of 2016. Analysts remain unconvinced, forecasting inflation of 5.5 percent next year.

Prices have surged as Brazil’s currency has tumbled 14 percent this year, the worst performance among 24 emerging-market currencies tracked by Bloomberg. A weaker real fuels inflation by making imports more expensive.

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