Brazil to Ignore Pressure for Higher Key Rate, Tombini Says

Emerging Market Currencies Continue to Get Slammed
  • Central bank president tries to calm currency markets
  • Real reverses losses, swap rates drop after comments

Brazilian policy makers will ignore pressure from traders to increase borrowing costs and are confident that keeping interest rates on hold is sufficient to tame inflation, central bank President Alexandre Tombini said. Swap rates fell and the real reversed its losses.

Tombini spoke in a surprise appearance at a press conference in Brasilia, after swap rates jumped to a seven-year high despite the central bank’s inflation report that reiterated policy makers’ plan to keep the benchmark interest rate, known as the Selic, on hold.

“The increase of interest rates in the market will not be used as a guide for monetary policy," Tombini told reporters in Brasilia Thursday. “The monetary policy that we are reiterating is the stability of the Selic rate for a sufficiently prolonged period of time.”

Swap rates maturing in January 2017 dropped 65 basis points to 15.82 percent at 3:57 p.m. local time, after rising as much as 80 basis points. The real, after weakening as much as 1.66 percent, gained 2.8 percent. Tombini said the central bank could use all instruments, including its international reserves, to assure that currency and interest-rate markets function properly.

‘Some Relief’

Tombini “brought some relief to the markets,” Jankiel Santos, Haitong chief economist, said in a phone interview from Sao Paulo. “Markets were concerned that with the exchange rate dropping as it was, the central bank would be forced to crank up the benchmark interest rate.”

Traders still doubt Tombini will be able to hold rates unchanged after Standard & Poor’s cut Brazil’s credit rating to junk. Investors are concerned the government’s plan to shore up fiscal accounts will be blocked in Congress and expect the Selic to be lifted to as high as 14.75 percent in October from 14.25 percent to compensate for the looser fiscal policy.

In its quarterly inflation report, the bank earlier Thursday said that the deepest recession in 25 years will more than offset the impact of the weaker currency on prices, allowing it to hold interest rates even as the inflation outlook deteriorates.

Policy makers increased their 2016 inflation rate forecast to 5.3 percent, up from 4.8 percent, according to their reference outlook published on the bank’s website. They said the growing gap between inflation expectations and the 4.5 percent target is still relatively narrow, reiterating that they can meet their goal by keeping rates unchanged at 14.25 percent for a prolonged time.

Recession

”The recessionary scenario of economic activity should contribute to a 
reduction of the inflation trajectory of free prices in the rest of the year, more than offsetting the impact of currency shocks,” the central bank said in its quarterly inflation report. The monetary policy committee “considers that the scenario of inflation convergence toward 4.5 percent at the end of 2016 has been maintained, despite a worsening of the balance of risks recently exacerbated by the effects of the sovereign credit rating downgrade.”

The central bank forecasts the economy will contract 2.7 percent this year, compared with an earlier forecast of a 1.1 percent decline. Standard & Poor’s credit downgrade will delay the recovery in Latin America’s biggest economy, it said.

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