Brazil Raises Rate More Than Estimates as Inflation Saps GDP

Brazil’s central bank unexpectedly accelerated the pace of interest rate increases, as policy makers step up efforts to slow inflation that forestalled the economy’s rebound in the first quarter.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate 50 basis points to 8.00 percent, matching the forecast of 19 of 57 economists surveyed by Bloomberg. Thirty-eight analysts expected a second straight 25 basis-point increase.

President Dilma Rousseff’s administration has renewed pledges to slow inflation even as Brazil’s $2.5 trillion economy has expanded less than expected by analysts for five straight quarters. While the government kept borrowing costs at a record low 7.25 percent from October through March and expanded tax cuts to spur activity, stimulus measures have failed to spark growth and driven inflation to the upper limit of the central bank’s target range. Latin America’s biggest economy unexpectedly slowed in the first quarter as higher consumer prices eroded demand.

“The decision was necessary due to inflation levels, and even with the weak economy,” Fernando Fix, chief economist at Votorantim Asset Management, said by phone from Sao Paulo. “Inflation is at high levels, and represents one of the main reasons behind low growth.” Fix expects the Selic to end the year at 8.75 percent.

Swap rates on the contract maturing in July, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 7.56 percent. The real weakened 1.7 percent to 2.1106 per dollar.

‘Timely Way’

Today’s decision represented the first time since Tombini became president of the central bank in 2011 that policy makers surprised analysts surveyed by Bloomberg by setting the benchmark rate at a higher-than-expected level.

Central bankers may have to “intensify” use of the Selic to tame inflation, the institution’s economic policy director Carlos Hamilton said April 25. Tombini on May 21 said the bank will “do what is necessary, in a timely way” to ensure price increases slow in the second half of the year. Brazil won’t tolerate inflation, as price increases hurt growth, Finance Minister Guido Mantega said today.

Annual inflation accelerated for nine straight months through March to 6.59 percent, above the top of the central bank’s target range of 2.5 percent to 6.5 percent. In April, year-on-year inflation eased to 6.49 percent.

Policy Plan

Policy makers today said they expect that the half-point rate increase will slow inflation throughout this year and 2014, according to their statement posted on the central bank’s website.

Analysts who cover Brazil’s economy forecast year-end inflation at 5.81 percent, up from a previous projection of 5.71 percent a month ago, according to the central bank’s latest weekly survey of about 100 economists.

Inflationary pressures are persisting across areas of the economy including transportation and food and beverage, according to Carlos Kawall, the chief economist at Banco J. Safra.

Retail sales in March unexpectedly fell for the third time in four months, while consumer confidence has declined to a three-year low.

“There are problems created by logistics and supply restrictions,” Kawall said by phone from Sao Paulo before today’s decision. “This creates an inertia effect that results in higher inflation in later periods. The central bank has to fight this effect.”

GDP, Expectations

Brazil is the only country in the Group of 20 nations whose central bank is raising its key rate. In the past month, countries including Israel, the European Union, Australia and India have all lowered borrowing costs.

Brazil’s economy expanded 0.55 percent in the first quarter, the national statistics agency said today. The result was lower than the 0.64 increase pace set in the fourth quarter of 2012, and below the 0.9 percent median forecast of economists surveyed by Bloomberg.

Consumer default rates in April fell for the fourth straight month, while unemployment hovers near record lows. Industrial production in March expanded 0.7 percent after plunging the most since 2008 in February.

Brazil’s gross domestic product growth is accelerating and government measures to boost investments are working, Mantega said today.

Anchoring Expectations

Brazilian companies have posted their longest stretch of earnings disappointments on the back of the country’s uneven recovery.

Thirty-seven of the 65 companies on the Ibovespa index reported first-quarter results that trailed analyst’s estimates. Four companies posted unexpected losses, including homebuilder Gafisa SA and mining company MMX Mineracao & Metalicos SA.

Brazil’s economy expanded 0.9 percent last year, the slowest pace since 2009. Economists surveyed weekly by the central bank have cut their 2013 growth forecast for the second straight week to 2.93 percent, below the central bank’s forecast of 3.1 percent.

Even as economic growth remains a concern for the central bank, policy makers are raising rates in an effort to anchor inflation expectations, according to Darwin Dib, chief economist at CM Capital Markets Asset Management.

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