Tombini and Mantega Signal Brazil to Raise Key Rate Soon

Brazil’s central bank President Alexandre Tombini and Finance Minister Guido Mantega signaled that policy makers will raise the benchmark rate soon as inflation accelerates above the bank’s target range. Swap rates jumped.

“There is not and there won’t be tolerance of inflation,” Tombini told reporters in Rio de Janeiro. “We are closely monitoring all indicators and in the future will make decisions on the best course for monetary policy.”

Brazil is ready to take necessary steps, including higher rates, to control inflation, Mantega said earlier today at an event in Sao Paulo. There is no need to slow growth to control price increases, Mantega added.

“This is a clear signal that the probability of an April rate hike is a lot higher,” Tony Volpon, head of research for the Americas at Nomura Securities, said in a telephone interview from New York. “The word ’closely’ seals the deal.”

President Dilma Rousseff’s administration is under renewed pressure to slow inflation after annualized price increases in March breached the upper limit of the central bank’s target range for the first time since November 2011. Recent indicators show that the highest annual inflation levels in 16 months may be reducing purchasing power, as both industrial production and retail sales declined in February.

Inflation Jump

Traders this week increased bets that policy makers will raise interest rates at the April 16-17 monetary policy meeting.

Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, rose 25 basis points, or 0.25 percentage point, to 8.17 percent at 6 p.m. local time. The real strengthened 0.3 percent to 1.9695 per dollar.

Annual inflation in the world’s second-largest emerging market jumped to 6.59 percent in March from 6.31 percent the month prior. The central bank targets inflation at 4.5 percent, plus or minus two percentage points.

“The government gives great attention to control of inflation, and we have been successful,” Mantega said today. “The government has strong reasons to exert itself and not let inflation rise. Inflation hinders investment and undertakings in all productive sectors.”

Retail sales fell 0.4 percent in February on a drop in supermarket purchases, the national statistics agency said yesterday. Industrial output in the same month declined 2.5 percent, the biggest drop since December 2008.

Latin America’s largest economy expanded 0.9 percent last year, the slowest pace in three years. Growth will rebound to at least 3 percent this year, Mantega said last month.

’Permanent Vigilance’

South American central bankers met in Rio de Janeiro today, after which they released a statement saying that while inflation is generally under control, it still requires “permanent vigilance,” particularly due to external shocks.

The countries “are still in a scenario that contains a number of uncertainties,” Luiz Awazu Pereira, the Brazilian central bank’s director of international affairs and regulations, told reporters. “For that reason, there is still an indication of a low-growth trend for a prolonged period.”

Awazu said it is too soon to tell how Japan’s expansionary monetary policy will affect South American markets. The central bankers will next meet in October in Bolivia.

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