Brazil Keeps Rate Before New Central Bank Chief Takes Post

  • All 41 analysts surveyed correctly forecast the decision
  • Selic kept near 10-yr high 14.25% for seventh straight meeting

Brazil kept borrowing costs unchanged as a new central bank president is set to take over the challenge of slowing inflation to target without exacerbating the worst recession in over a century.

Policy makers, led by departing bank President Alexandre Tombini, on Wednesday voted unanimously to keep the Selic at a near-decade high of 14.25 percent for a seventh straight meeting as expected by all 41 analysts surveyed by Bloomberg. The committee’s statement matched the communique from their April 27 decision, suggesting that policy makers wanted a smooth handover to new central bank President Ilan Goldfajn.

“The Copom decided not to compromise action by the future president," said Andre Perfeito, chief economist at brokerage Gradual Cctvm. “They put the direction of monetary policy and the bank’s communication in the hands of Goldfajn."

Goldfajn, the former chief economist at Brazil’s biggest private bank, on Tuesday won Senate approval to take over from Tombini and will chair his first monetary policy meeting in July. Helping a government hobbled by a record budget deficit mount a balanced response to both recession and near double-digit inflation will call upon all of his considerable experience and training.

Swap rates rose on Thursday following the central bank’s decision and a much higher-than-forecast reading for the IGP-M index, Brazil’s broadest measure of inflation. Yields paid on interest-rate contracts maturing in January 2017 climbed 6 basis points to 13.65 percent at 9:56 a.m. local time.

‘Right Direction’

The new administration of Acting President Michel Temer has buoyed investor “confidence because they seem to have support for legislation and the measures are in the right direction,” Luciano Rostagno, chief strategist at Sao Paulo-based Banco Mizuho do Brasil SA, said. “Ilan will need some sort of clarity on the fiscal side before he could act to cut rates.”

Finance Minister Henrique Meirelles, the central bank chief from 2003 through 2010, has proposed measures to cap public spending in the long term. He also intends to reduce the 170.5 billion-real ($50.7 billion) primary budget deficit lawmakers agreed to last month. While Temer appears to have a working majority in Congress for his legislative aims, lawmakers last week voted to approve wage hikes for civil servants even as the government desperately needs to cut expenses.

Brazil Inflation to Slow Into 2017 on FX Gains, Recession: Bloomberg Intelligence

At his confirmation hearing Tuesday, Goldfajn pledged to prioritize the fight against inflation that has failed to slow as expected this year. Earlier Wednesday, the national statistics agency reported that annual inflation quickened in May to 9.32 percent from 9.28 percent in April.

Noting the transition under way at the central bank, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said that next week’s minutes will fail to provide much in the way of guidance vis-a-vis monetary policy.

“The key venue to modify the forward guidance and potentially signal the next steps for monetary policy could be the Quarterly Inflation Report, to be published at the end of June; a report that will provide updated estimates for the projected path of inflation and the outlook for real activity,” he wrote in a research note published after the decision.

The country’s current benchmark lending rate has pinched already weak demand and caused debt servicing costs to balloon. With tax revenue declining, that leaves little room for stimulus measures and makes fiscal austerity all the more urgent.

“We’re going through the worst recession of Brazil’s history, with rising unemployment and considerable fiscal challenges,” Goldfajn said Tuesday. “But I fully trust that the internal scenario can be reversed.”

The bulk of Brazil’s woes are home-grown. The economy is tanking, uncertainty remains over President Dilma Rousseff’s impending impeachment trial, and the sprawling Carwash corruption investigation continues to knock at government doors. Yet Goldfajn will also have to keep a wary eye trained abroad.

Economic growth in China, Brazil’s largest trading partner, is downshifting after averaging 9.5 percent growth since 2000, the Federal Reserve appears poised to begin pushing up interest rates that have languished near zero since 2008 and Britain this month will hold a referendum on whether to leave or remain in the European Union.

“Foreign news will be more on the radar than ever,” said Newton Rosa, chief economist at Sul America Investimentos Dtvm. “With a more cautious approach from the Fed and less China turbulence, the real will probably be more stable and this will help Goldfajn.”

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