No Rate Cuts Seen in Brazil Despite Recession, Analysts Say

Is Brazil on the Brink of a Depression?

Brazil won’t have room to cut interest rates next year as inflation remains above the upper limit of the target in spite of a deepening back-to-back recession, according to a central bank survey.

Policy makers will keep the benchmark interest rate on hold at 14.25 percent next year, compared to a forecast of 14.13 percent a week earlier, the median estimate of about 100 economists in a Dec. 4 central bank survey shows. The survey followed indications by policy makers last week that the central bank is ready to boost borrowing costs next year.

“This is the reflection of the minutes that were released last week, which were much more hawkish than the previous minutes,” Edward Glossop, emerging market economist at Capital Economics in London, said by phone. “Policy makers are saying they’ll do what they need to do to get inflation as close to target next year as possible.” 

Meanwhile, analysts expect the economy to contract 3.5 percent in 2015 and 2.31 percent in 2016, compared with previous predictions of a 3.19 percent and 2.04 percent drop, respectively. It was the ninth consecutive weekly cut in GDP forecasts for next year, according to the survey.

Rousseff’s Impeachment

President Dilma Rousseff is struggling to carry out a fiscal austerity plan she says is necessary to recover confidence, slow inflation and boost economic growth. Her ability to implement the economic program of tax increases and spending cuts was further curtailed after Congress started impeachment proceedings against her last week.

Even as Brazil enters its first back-to-back recession since 1931, analysts forecast inflation will exceed the upper limit of the 2.5 percent to 6.5 percent inflation target range for two consecutive years. Consumer prices will increase 10.44 percent in 2015 and 6.7 percent in 2016, according to the central bank survey.

The central bank says it plans to bring inflation to its 4.5 percent target in 2017, and in its Nov. 24-25 monetary policy meeting held the Selic rate at 14.25 percent -- the highest level since 2006. Rising political and economic uncertainties threaten to keep consumer price increases above target for longer than initially expected, the central bank said in the minutes of the meeting.

Swap rate traders, unlike analysts, are already betting policy makers will be forced to raise borrowing costs. They see the interest rates being lifted to at least 16.5 percent by the end of next year, swap rates show.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE