Intensity of Brazil Rate Increases Hinges on Data, Pereira Says

The intensity of Brazil’s interest rate increases will depend on future data, central bank director Luiz Awazu Pereira da Silva said today, causing traders to boost bets on tighter monetary policy.

Brazil’s inflation dynamics remain unfavorable, Pereira said today at an event in Washington DC. The central bank’s split vote to raise the benchmark rate this week reflects an internal debate on what was the best timing for a raise, rather than whether to increase borrowing costs, he said.

Brazil’s central bank on Wednesday raised the Selic rate to 7.50 percent after holding it at a record low 7.25 percent since October. Two of the eight board members, including Pereira, voted to keep rates unchanged. The bank said “the high level of inflation and dispersion of price increases” prompted the first rate increase since July 2011. Policy makers are under pressure to slow inflation that surpassed the government’s target range.

“Intensity is something that we’ll consider in the future,” Pereira said today. “It wasn’t a discussion about if, but a discussion about when” to raise rates.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose three basis points, or 0.03 percentage point, to 7.87 percent at 4:50 p.m. local time, after previously declining as many as six points. The real strengthened 0.6 percent to 2.0076 per dollar.

Split Vote

On April 19, the swap rates plunged the most in 19 months as the split vote and a rate increase smaller than some traders expected spurred speculation monetary tightening cycle would be limited.

Pereira said he voted to keep interest rates unchanged because he expects the global economy to face a prolonged period of slow growth. The world is still on “thin ice,” he said

“Pereira’s comments show disagreement on the timing of the increase, but not the necessity,” Vladimir Caramaschi, chief strategist at Credit Agricole Brasil SA Dtvm, said in a telephone interview from Sao Paulo. “His remarks hit futures because the market was flirting with the idea that the tightening cycle was going to be less than 100 basis points. The chance of that happening were reduced.”

Annual inflation in March reached 6.59 percent. The central bank targets price increases of 4.5 percent, plus or minus two percentage points.

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