Brazil Keeps 7.25% Rate on Faster CPI Amid Slower Growth

Brazil’s central bank kept its benchmark rate at a record low for the third straight meeting, as policy makers seek to buoy the country’s economic recovery amid accelerating inflation.

The bank’s board, led by President Alexandre Tombini, left the Selic rate unchanged at 7.25 percent today, as forecast by all 59 economists surveyed by Bloomberg. It removed from the statement language used since October that said it would maintain monetary policy for a “prolonged period of time.” Instead, the board said it would assess “the macroeconomic scenario until its next meeting, to then define the next steps in its monetary policy strategy.”

President Dilma Rousseff’s administration is working to lift the world’s second-largest emerging market out of stagflation, after Brazil eked out 0.9 percent growth last year while price increases run near the top of the central bank’s target range. Even as the government extends tax cuts, lowers energy costs and pledges to lure more investment, economists have cut their 2013 growth forecast to 3.09 percent from as high as 4.50 percent last June.

“The new language means they’ll tighten, they have to if Dilma wants to enter an election year with inflation somewhat under control,” said John Welch, a strategist at CIBC World Markets, said by phone from Toronto. “They have to pack as much as possible into this cycle to be able to ease next year.” The board also said its vote was unanimous.

Swap rates on the contract maturing in July 2013, the most traded in Sao Paulo, fell three basis points, or 0.03 percentage point, to 7.21 percent. The real weakened 0.3 percent to 1.9704 per dollar.

‘Requires Attention’

Inflation is at a high level and requires attention, the central bank said in response to a report showing that consumer price increases in January exceeded economists’ expectations for the seventh straight month, jumping 0.86 percent and pushing the annual rate to 6.15 percent. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

Finance Minister Guido Mantega said on Feb. 15 that policy makers stand ready to combat inflation, adding that raising interest rates is an option.

After the real fell 9 percent against the U.S. dollar last year, policy makers have allowed the currency to strengthen 4.1 percent this year, the most among 16 major currencies tracked by Bloomberg. A stronger currency can help restrain inflation by making imports cheaper.

Policy Response

Even as officials plan new tax cuts and reduce electricity costs to try and tame price pressures, economists including Henrique Meirelles, former central bank president and current senior adviser for KKR Co. LP, expect inflation to remain close to the upper limit of the target range. Inflation is a “challenge” and will hover from 5.5 percent to 6 percent in 2013, Meirelles told investors March 5 in Rio de Janeiro.

Analysts forecast consumer price increases of 5.70 percent this year, according to the central bank survey of about 100 economists published on March 4.

Latin America’s biggest economy in 2012 expanded at the slowest pace in three years, the national statistics agency said March 1. The government predicts growth will rebound to at least 3 percent this year as the measures it took in 2011 and 2012 start to show effect, Mantega told reporters March 1. Investment, which rose in the fourth quarter for the first time after four consecutive drops, will continue to recover in 2013, he said.

Profits Squeezed

Government officials including Mantega traveled last week to New York and London to drum up $235 billion in infrastructure investment. Rousseff, who has met one-on-one with 11 businessmen, from billionaire Eike Batista to Banco Santander SA Chairman Emilio Botin, is trying to reverse a slide in confidence that’s behind the world’s second-worst stock slump among major exchanges.

The Bovespa index has fallen 4.9 percent this year, the fifth-worst performance among 94 major stock indexes tracked by Bloomberg worldwide

Companies have seen their profits squeezed by flagging economic activity. Lojas Renner SA, Brazil’s biggest clothing retailer, fell the most in a week on Feb. 27 after reporting fourth-quarter net income that trailed analysts’ estimates. ArcelorMittal, the world’s biggest steelmaker, this month joined rival Usinas Siderurgicas de Minas in raising prices in Brazil to recover profit margins reduced by lower growth and increased competition.

‘Last 45 Days’

Consumer demand will continue to propel growth this year, said Italo Lombardi, an economist at Standard Chartered Bank in New York, in an interview before today’s decision. Family consumption will be robust, while the service sector is also showing strength, he said.

The shift in policy makers’ language signals that consumer prices have surpassed economic activity as the top concern on central bankers’ minds, according to Marcelo Salomon, the co-head for Latin America economics at Barclays Plc.

“Things changed in the last 45 days,” Salomon said in a telephone interview from New York before today’s decision. “They are a lot more hawkish than they were previously. What they are telling the market is that they are willing to hike earlier than they or we thought.”

(Updates to add analyst comment in fourth paragraph.)
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