Brazil Signals No Imminent Key Rate Rise on Growth Outlook

Brazil’s central bank said monetary policy requires caution amid a slower-than-expected recovery, signaling policy makers may refrain from increasing borrowing costs in April even as inflation quickens.

The central bank kept the Selic rate at 7.25 percent for a third consecutive meeting on March 6, saying its next step will depend on economic indicators. While removing from the minutes today a reference to keeping the key rate at a record low for a “sufficiently prolonged” period, there was no indication policy makers plan to start reversing next month interest rate cuts that marked President Dilma Rousseff’s first two years in office. Swap rates fell.

Rousseff’s administration has been caught between the slowest growth since the aftermath of the Lehman Brothers collapse in 2009 and the fastest annual inflation in 14 months. Traders reduced bets today the central bank will increase rates as early as next month, after the minutes showed that concerns over the speed of recovery may delay higher borrowing costs, Roberto Padovani, chief economist at Votorantim Ctvm Ltd, said in a phone interview from Sao Paulo.

The monetary committee “considers that uncertainties -- both external and internal -- remain in the outlook and require a cautious management of monetary policy,” the central bank said in the minutes. The committee “will follow the evolution of the macroeconomic scenario until its next meeting, to then decide its next step.”

Swap Rates

Swap rates on the contract due January 2014 fell 13 basis points, or 0.13 percentage point, to 7.83 percent at 1:01 p.m. local time. The contract is heading to its biggest one-day drop since falling 23 basis points on Dec. 6.

“The minutes were a little bit more dovish than people expected,” Padovani said in a phone interview from Sao Paulo. “The central bank is worried about inflation, but they are not indicating an imminent rate increase.”

Brazil’s government has extended payroll tax cuts to new industries, reduced electricity costs and eliminated federal taxes on food staples in efforts to cushion Brazil’s economic recovery while taming consumer price increases. Officials stand ready to do whatever it takes to control inflation, Finance Minister Guido Mantega said last month, adding that interest rate increases are an option.

Limited Impact

The measures so far have had a limited impact on consumer prices, as annualized inflation in February accelerated for the eighth straight month to 6.31 percent from 6.14 percent in January.

“There is a clear indication that the central bank will raise rates,” Newton Rosa, chief economist at Sul America Investimentos, said in a phone interview from Sao Paulo. “Inflation is not going to provide any pleasant surprises. On the contrary, it is going to continue to be resilient,” influencing the bank to raise rates in April.

After Brazil’s economy expanded by 0.9 percent last year, recent indicators show activity may be gaining speed. Retail sales in January rose 0.6 percent from December, the national statistics agency said today in a separate report. The gain was bigger than the 0.4 percent median forecast in a Bloomberg survey of 30 economists.

Growth in Latin America’s largest economy will rebound to at least 3 percent this year as investments rebound, Mantega said on March 1.

In its minutes, the central bank signaled it is waiting for more consistent signs of an economic recovery, according to Neil Shearing, chief emerging markets economist at Capital Economics.

“This tempers the expectations of a sizable rate hike,” Shearing said in a phone interview from London. “Growth in the fourth quarter was not much return for the massive amount of stimulus they’ve injected into the economy.”

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