Brazil Balks at Rate Rise, Picks Recession Fight Over Prices

  • Economy heads toward the worst downturn in more than a century
  • Two members of the board dissented, voted for 14.75% rate

In a surprise decision, Brazil balked at raising interest rates as it wagers the nation’s worst recession in decades will be enough to damp double-digit inflation.

Just 15 of 57 analysts surveyed by Bloomberg predicted the outcome, which marks the fourth straight meeting that borrowing cost were kept unchanged at 14.25 percent. The remainder of economists expected an increase of 25 or 50 basis points, and two members of the eight-person central bank board voted for a 50-point hike to 14.75 percent.

Since the bank’s last meeting in November, surging inflation and hawkish central bank commentary had most observers anticipating a half-point increase Wednesday. Upsetting those expectations, the International Monetary Fund on Tuesday published revised forecasts for Brazil, estimating a deeper and longer recession that central bank President Alexandre Tombini dubbed “significant.” Policy makers said in a statement accompanying the decision they took into consideration increased uncertainties, especially those abroad.

“This gives the impression that they used the IMF as an excuse," Thais Zara, chief economist at consulting firm Rosenberg Consultores Associados, said after the decision. "Holding rates is defensible, but they would have to have been making this argument since the prior meeting."

Swap rates on the contract due in January 2017 fell 0.235 percentage point to a near two-month low of 15.145 percent while the real weakened for a second day, falling 0.8 percent to 4.0976 per dollar on Wednesday in Sao Paulo.

Inflation, IMF

Tombini since the bank’s Nov. 25 meeting has pledged to bring consumer price increases down to target by the end of next year. Annual inflation closed the year at 10.67 percent, more than double the target of 4.5 percent.

Concern about inflation gave way to talk of recession this week when the IMF revised its forecasts Tuesday. Tombini seized on the new estimates, breaking the central bank’s long standing practice of maintaining public silence around its monetary policy meetings.

The Washington-based lender now sees Brazil’s economy shrinking 3.5 percent in 2016, down from October’s prediction for a 1 percent contraction, and stagnating in 2017. That would be the longest period without growth in over a century.

Political Pressure

While President Dilma Rousseff has reaffirmed that the central bank has autonomy over its decisions, her Workers’ Party has stepped up public criticism of its monetary policy and urged it to refrain from increasing rates.

Workers’ Party leader Rui Falcao said Brazil should lift the inflation target to make the central bank less keen to hike borrowing costs in a moment of economic depression. Pressure on Tombini has only increased since Joaquim Levy, targeted by many in the ruling party over his push for fiscal austerity, left his post last month to be replaced by Nelson Barbosa.

Yet Jason Vieira, the chief economist at Infinity Asset Management, which oversees 200 million reais ($49 million), cautioned against attributing Wednesday’s decision to political pressure. Rate increases in Brazil haven’t had the desired impact on inflation expectations, which have become unanchored, he said.

“During a severe recession, increasing rates moderately without showing a clear plan to bringing prices down would be like shooting yourself in the foot,” he said. “The central bank would have to increase by 100 basis points to have any impact."