Brazilian Central Bank Sees a ‘Prolonged’ Cycle of Interest Rate Increases
Brazil’s central bank said it will raise interest rates at a slower pace for a longer period than initially planned as the country’s inflation outlook worsens, according to the minutes of its April 19-20 meeting.
Policy makers raised the benchmark Selic rate by 25 basis points, to 12 percent, on April 20 after 50 basis-point increases at each of their two previous meetings this year. They said today that a “substantial” part of their anti- inflationary effort has already been implemented given the recent rate increases and measures to curb credit.
The decision to slow the pace of interest rate increases was “associated to the decision to prolong the adjustment cycle,” the bank said. “The monetary policy committee understands, with unanimity, that given uncertainty over the persistence of recent inflationary pressures and the complexity of the global environment, the total adjustment of the reference interest rate should be, starting at this meeting, sufficiently prolonged,” today’s minutes said.
President Dilma Rousseff’s administration is relying on a mix of higher borrowing costs, measures to curb credit growth and spending cuts to bring the fastest inflation in 29 months back to policy makers’ 4.5 percent target in 2012. Consumer prices are likely to exceed the 6.5 percent upper limit of the target range in the third quarter, according to central bank estimates.
“The majority of the committee believes that a substantial anti-inflationary effort was already introduced in the economy over the past four months,” the central bank said.
The yield on the interest-rate futures contract due in January 2012, the most traded on Sao Paulo’s BM&F exchange today, rose two basis points to 12.33 percent at 9:11 a.m. New York time, after the minutes reinforced bets that the central bank will raise rates again in June.
Policy makers will raise the benchmark rate by a quarter point at each of its next two meetings, pushing the Selic to 12.50 percent before pausing, said Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo.
“The tone and assessment of inflation risks changed meaningfully,” Latif said via e-mail. “Inflation forecasts worsened, and it reduced the central bank’s confidence in the previous strategy.”
Jankiel Santos, chief economist at Espirito Santo Investment Bank, now expects the central bank to raise rates by 25 basis points at its next three meetings, he said in a telephone interview from Sao Paulo. Santos had previously forecast a single further rate increase.
Policy makers, who had expected gasoline prices to remain unchanged, now see fuel costs jumping 2.2 percent this year because of turmoil in North Africa and the Middle East, the minutes show. They also revised their 2011 forecast for increases in regulated prices, including public transport and utilities, to 4.3 percent from 4 percent.
Consumer prices in Brazil accelerated to 6.44 percent in the year through mid-April, the fastest pace since November 2008. The central bank targets inflation of 4.5 percent plus or minus two percentage points to accommodate price shocks.
The central bank is “buying time” by extending its cycle of rate increases as it assesses the effects of the actions it has already taken, said Enestor Dos Santos, senior Brazil economist for BBVA in Madrid.
Praying For Help
“They are waiting for these actions to have an impact and praying for the international environment to provide some help,” Dos Santos said, speaking by telephone. “There is a difference between this central bank and the previous one. In the past you would see them shooting first and asking questions later. This time they are asking before shooting.”
Rousseff’s government pledged to cut 50.7 billion reais ($32.4 billion) from its 2011 budget to help curb inflationary pressure. In December the central bank raised banks’ reserve requirements to slow credit growth, and this month the government doubled to 3 percent the so-called IOF tax on consumer credit.
Taming inflation will require an “incisive” effort, central bank President Alexandre Tombini said on April 26.
Less Lending Growth
Bank lending expanded in March at the second-slowest pace in 13 months, the central bank said in a report yesterday. Total outstanding credit rose 1 percent in March to 1.75 trillion reais from a revised 1.73 trillion reais in February, down from a 1.3 percent increase in the previous month. The average interest rate charged on consumer loans rose to 45 percent in March, up from 43.8 percent in February, the bank said.
The central government primary surplus, excluding interest payments, widened to 9.1 billion reais in March, the Treasury said April 26. The surplus was wider than the median 8.2 billion reais estimate in a Bloomberg survey of 13 analysts.
Recent measures announced and implemented by the government show that “fiscal consolidation” is being carried out, the minutes said.
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