Brazilian policy makers may take longer to start cutting interest rates than analysts predict because they want to make absolutely sure that inflation has been tamed before making their move.
The inflation outlook for 2016 would need to fall below the 4.5 percent target and stick to the goal for the following years to create conditions for monetary easing, a member of President Dilma Rousseff’s economic team with knowledge of monetary policy said.
Brazilian policy makers are trying to squash economists’ expectations that the worst recession in 25 years will force their hand into cutting rates as soon as January. The central bank has argued that it needs to stay focused on pushing inflation back to target because that is the guarantor of a sustainable recovery.
Analysts surveyed by the bank predict interest rates will be lowered in January after being raised to 14.5 percent by September. These same analysts expect consumer prices to increase 5.5 percent next year and 4.7 percent in 2017, above the target.
Swap rates on the contract due in January 2017 extended earlier gains and rose 7 basis points, or 0.07 percentage point, to 14.01 percent at 3:47 p.m. local time. The real weakened 1.19 percent to 3.14 per U.S. dollar.
The central bank will increase interest rates until its forecasts show inflation at target in 2016 and then pause, said the official, who asked not to be named because the discussions aren’t public.
“The central bank needs to be hawkish because of the inflation situation,” Daniel Weeks, chief economist at Garde Asset Management, said in a phone interview.
Brazil’s inflation quickened to 8.47 percent in May, the fastest pace in more than 11 years.
The central bank has increased rates in six straight meetings by a total of 275 basis points to 13.75 percent. Brazil is the only nation among the G-20 to have increased the key rate this year.