Brazil Bets on Slow Global Growth to Avoid Bigger Rate Raise

Brazil’s central bank signaled it will continue to raise interest rates at a slow pace as it says weak global growth may help contain above-target inflation.

The bank’s board, led by President Alexandre Tombini, voted by a 6-to-2 margin to increase the benchmark Selic rate to 7.50 percent after holding it at a record 7.25 percent since October. The first increase since July 2011 came after annual inflation accelerated beyond the 6.5 percent upper limit of the bank’s target range in March. Higher prices undermine potential growth of the economy, jobs and income, the central bank said in the minutes to its April 16-17 meeting published today.

While high and disperse levels of price increases demanded a monetary policy response, internal and especially external “uncertainties” require caution from policy makers, the central bank said today. It expects a prolonged period of slow economic growth in rich economies, and part of its board said the international environment may help ease inflationary pressures.

“The minutes are dovish,” Roberto Padovani, chief economist at Votorantim Corretora, said in an interview from Sao Paulo. “The bank says the global economic scenario creates lower inflationary risks and the rhythm of Brazil’s economic growth is also not clear.”

Policy Makers

Padovani forecasts policy makers will refrain from accelerating the pace of rate increases and will raise rates by 25 basis points in each of the next four meetings.

Swap rates on the contract due January 2015, the most traded in Sao Paulo today, fell four basis points, or 0.04 percentage point, to 8.24 at 12:14 p.m. local time. The real strengthened 0.02 percent to 2.0098 per U.S. dollar.

Annual consumer prices in March jumped to 6.59 percent from 6.31 percent the month prior, according to the national statistics agency. The central bank targets inflation at 4.5 percent, plus or minus two percentage points.

The central bank signaled today that it’s concerned primarily with inflation in 2014 and that its tightening cycle won’t exceed 100 basis points, said Carlos Kawall, chief economist at Banco Safra SA. “The minutes show that a cycle of that magnitude will be sufficient to bring 2014 inflation to around 5 percent,” Kawall said by phone from Sao Paulo.

Above Target

The central bank’s policies may be insufficient to bring inflation closer to the center of the target range, Tony Volpon, head of research for the Americas at Nomura Holdings Inc., said in an e-mailed note.

The bank “appears willing to live with extended periods where inflation is much above its target,” Volpon wrote. “Despite the upcoming good inflation news from lower commodity prices, this policy stance will, at best, stabilize inflation in the 6 percent region.”

Brazil’s economic recovery has struggled to gain traction, even after officials extended tax cuts on consumer goods and payrolls and reduced electricity costs this year. Both industrial production and retail sales dropped in February, while consumer confidence fell for six straight months through March, according to the Getulio Vargas Foundation.

Brazil’s unemployment rose less than expected in March to 5.7 percent, a record low for that month, the national statistics agency said today. The jobless rate was 5.6 percent in February.

Latin America’s largest market will expand by at least 3 percent in 2013, Finance Minister Guido Mantega said last month. That’s up from 0.9 percent last year and 2.7 percent in 2011.

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