Brazil Holds Rate at 14.25% on Bet Downturn to Damp Prices

  • Most analysts correctly forecast the hold; two expected a hike
  • Annual GDP data Thursday forecast to be worst since 1990

Brazil’s central bank kept its benchmark interest rate unchanged for a fifth consecutive meeting on the view that the deepest recession in decades, steep borrowing costs and weaker global growth will combine to slow inflation dramatically.

Policy makers, led by President Alexandre Tombini, held the key rate at a nine-year high of 14.25 percent on Wednesday, as forecast by 44 of 46 analysts surveyed by Bloomberg. The remainder of economists expected an increase of 25 or 50 basis points. Two members of the eight-person central bank board, Tony Volpon and Sidnei Correa Marques, voted for a half-point hike.

The central bank board has signaled it has little room to maneuver as it fights a two-front battle against surging inflation and a crushing recession. Making matters worse for the board, fiscal policy may not cool prices as an expanding political crisis hobbles President Dilma Rousseff’s push for austerity. Some legislators and business leaders have warned that further tightening may cause an undo deepening of the recession and that demand is already weakening sufficiently to slow inflation.

"The economic situation is truly worse than previously estimated," Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said before the decision. "The central bank sees that this will have an impact on employment and it could help bring inflation to target."

About-Face

At their last meeting on Jan. 19-20, the central bank surprised most analysts and traders who expected at least a quarter-point increase. Policy makers had adopted a uniformly hawkish tone in December and most of January, only to switch course the day the gathering started by highlighting their concern about the severity of Brazil’s recession.

The about-face sent swap rates plunging, as traders rolled back bets on hiking this year. Policy makers denied accusations they were giving into political pressures to protect the economy, and in recent days have stepped up their public commentary to play down speculation they will cut the key rate to revive growth.

Gross domestic product will shrink 3.2 percent this year after falling an estimated 3.7 percent in 2015, marking Brazil’s most protracted downturn in over a century, according to analysts surveyed by Bloomberg. The government statistics agency on Thursday is scheduled to publish GDP data for the last three months of 2015, which analysts expect will show the fourth consecutive quarterly contraction.

"GDP will probably have a bigger drop this year than currently estimated, and some see it contracting 4 percent," said Carlos Kawall, chief economist at Banco Safra.

‘The Question’

The downturn hasn’t yet contained inflation, which accelerated the most in more than 12 years at the start of 2016 to 10.7 percent. While that’s more than double the official target of 4.5 percent, policy makers expect inflation to slow this year and next.

"With the economy performing as it is, there is a disinflationary force at play," Tombini said late last month. "That’s why we decided like we did on monetary policy in January. We will see this starting to impact annual inflation rates in February."

Analysts agree that inflation will start easing, dropping by more than 3 percentage points this year and another 1.5 points in 2017, according to a weekly survey published by the central bank. Their median forecast is for policy makers to start cutting its key rate next year, though some banks such as Itau Unibanco Holding SA and Barclays Plc expect reductions to start even sooner.

"Now the question is, when will they start cutting rates?" said Mizuho strategist Rostagno.

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