Brazil May Have to Step Up Rate Raise Pace, Hamilton Says

Brazil’s central bank may have to step up the pace of interest rate increases to tame above-target inflation, its director for economic policy, Carlos Hamilton, said today. Swap rates rose.

“I have a growing conviction that the Copom may be prompted to reflect on the possibility of intensifying the use of its monetary policy tool, the Selic rate,” Hamilton said at an event in Sao Paulo, referring to the bank’s policy making committee.

Swap rates reversed an earlier drop and surged after Hamilton’s comments, which surprised traders who had earlier interpreted the central bank minutes published today as a sign that the current pace of interest rate increases would be maintained. Swap rates rose further after a person familiar with monetary policy discussion said Hamilton wasn’t isolated on the board with his view.

Hamilton’s speech was endorsed by other members of the central bank’s board, said the person, who can’t be named because the debate isn’t public.

The bank’s board, led by President Alexandre Tombini, voted 6-to-2 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.

Market’s View

“The market interpreted that a faster pace of rate increase can’t be ruled out,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said in a phone interview in reference to Hamilton’s comments. “He is only one member of the central bank board, but he needs to be heard.”

The swap rate contract maturing in January 2014 gained 10 basis points, or 0.10 percentage point, to 7.93 percent at 4:56 p.m. local time, after having dropped as much as three basis points.

In the minutes of the bank’s April 16-17 meeting published today, the board reiterated that an unclear outlook for the world economy required a cautious monetary policy. Policy makers said slower global economic growth could help contain inflationary pressures, prompting investors to reinforce bets for a more gradual tightening cycle.

Cohesion Questions

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. The bank expects a prolonged period of slow economic growth in rich economies, and some board members said the international environment may help ease inflationary pressures.

Hamilton, who voted in favor of the rate increase this month, said Brazil’s economy can’t grow much more than 3.1 percent without fueling inflation. The central bank predicts Latin America’s biggest economy will expand 3.1 percent this year.

The contradictions between Hamilton’s comments and the minutes show a lack of cohesion in the central bank’s communication, Andre Perfeito, chief economist at Gradual Investimentos, said in a phone interview from Sao Paulo.

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