Brazil Signals World’s Biggest Key Rate Rise Far From OverMatthew Malinowski and Arnaldo Galvao
Brazil’s central bank raised the benchmark interest rate a third consecutive time and said it was giving continuity to the world’s biggest tightening cycle, signaling increases may be extended through year-end as policy makers battle inflation.
The bank’s board, led by President Alexandre Tombini, yesterday raised the benchmark Selic rate by 50 basis points to 8.50 percent, as forecast by all 51 analysts surveyed by Bloomberg. The move led Itau Unibanco to reiterate its call for a rate increase in each of the three meetings left this year.
Brazil, Egypt and Indonesia are the only three major economies tracked by Bloomberg that are raising interest rates as emerging markets take steps to stem capital outflows sparked by concern the U.S. Federal Reserve will start to scale back liquidity injections. In Brazil, quickening inflation is sapping economic growth and further driving away investors.
“Emerging markets will now have to compete for capital with the U.S.,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “Countries that carried out the necessary adjustments will suffer less. Brazil is likely to suffer more.”
New leaders in China reined in credit growth as President Xi Jinping signaled last month he will tolerate slower growth amid signs banks have overextended their finances by lending to property companies and local governments.
In India, a plunge in the rupee prompted the nation’s market regulator to tighten rules on futures and options transactions this week, while the central bank barred banks from proprietary trading of such contracts. The Reserve Bank of India also held interest rates last month for the first time in four reviews, citing inflation risks.
Brazil is one of only three countries among 50 major economies tracked by Bloomberg that is raising borrowing costs this year as above-target inflation undercuts months of government stimulus by curbing retail sales growth. After a quarter-point rate increase in April, policy makers in Brazil doubled the pace in May and reiterated warnings that the outlook for inflation remains unfavorable.
Indonesia today raised its key rate by 50 basis points, more than forecast, to 6.5 percent to bolster a weakening currency and ease inflation pressures after the government increased fuel prices last month.
Brazil consumer prices rose 6.70 percent in June from last year, the fastest pace since October 2011, the national statistics agency said July 5. The central bank targets inflation at 4.5 percent, plus or minus two percentage points.
Yesterday’s move to continue with a 50 basis-point increase “will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said in a statement accompanying the decision.
The central bank board known as Copom will raise rates by 50 basis points in their next two meetings before finishing the year with a quarter-point increase, Itau economists Ilan Goldfajn and Caio Megale wrote in a note e-mailed to investors yesterday.
“By maintaining the pace of rate hikes and the statement, the Copom suggests comfort in its plan to fight inflation,” they wrote.
Swap rates on the contract maturing in January 2014 fell two basis points to 8.78 percent at 10:28 a.m. today.
A dimming outlook for emerging markets prompted the International Monetary Fund this week to cut its global growth forecast for 2013 to a “subdued” pace of 3.1 percent. The Washington-based lender reduced its estimate for emerging economies to 5 percent from 5.3 percent from April while dropping the outlook for Brazil to 2.5 percent from 3.4 percent.
Since May 29, when Brazil’s government reported that growth of gross domestic product unexpectedly slowed to 0.55 percent in the first quarter, a number of key economic indicators have missed expectations.
Retail sales, which helped propel Brazil’s economic expansion in recent years, were unchanged in May from April, the national statistics agency said today. Supermarket and hypermarket sales jumped 1.9 percent in May after falling a revised 0.3 percent in April.
While retail sales were stronger than economists’ median forecast of a 0.4 percent decline, and food and beverage costs have started to ease, factors including slowing credit growth and a weakening labor market are crimping shoppers, according to Newton Rosa, chief economist at SulAmerica Investimentos.
Lojas Renner SA, Brazil’s biggest clothing retailer, is one of the companies that has seen its business outlook deteriorate on inflation concerns. The company’s share price on June 28 declined to the lowest level since August after JPMorgan Chase & Co. cut its recommendation on the stock due to declining disposable income and deteriorating consumer sentiment.
Industrial output declined 2 percent in May, lower than all 29 forecasts of analysts surveyed by Bloomberg. The same week, analysts cut their economic growth forecasts for Brazil for this year and next to below 3 percent for the first time, according to the July 5 central bank survey.
“Economic activity is weak, and that’s a sign that inflation continues to be high,” Darwin Dib, chief economist at CM Capital Markets Asset Management, said by phone from Sao Paulo before yesterday’s decision.
Brazil’s Ibovespa has declined 31.4 percent in dollar terms in 2013, the worst performance among 94 global benchmark indexes after the Lima General Index. The Hang Seng China Enterprises Index has dropped 16.5 percent.
The real fell 0.1 percent to 2.2677 per dollar today at 10:46 a.m. local time and has weakened 12.9 percent in the past three months, the second biggest drop among the 16 most-traded currencies tracked by Bloomberg.
The rout comes as investors withdrew $13.9 billion from equity mutual funds invested this year in BRICs nations that also include Russia, India and China, according to EPFR Global. The MSCI BRIC Index fell 12 percent last quarter while the nations’ currencies sank 4.1 percent against the dollar and government bonds lost an average 0.6 percent, the only such correlation in data compiled by Bloomberg going back seven years.
The real’s depreciation pushes up the price of some imports and threatens to further fuel inflation that helped spark nationwide demonstrations last month.
Protesters took to the streets in early June to oppose a bus fare increase in Sao Paulo. Discontent later spread to other metropolitan centers including Brasilia, Porto Alegre and Rio de Janeiro, as demonstrators expanded their grievances to include corruption and public services.
Citing a need to rein in federal spending, Finance Minister Guido Mantega on June 27 decided to gradually unwind tax cuts on home appliances. Days later, President Dilma Rousseff said that fiscal control helps contain inflation.
The central bank board will contribute by tightening monetary conditions in future meetings, John Welch, macro strategist at Canadian Imperial Bank of Commerce, said. Welch, like Itau, expects two more half-point increases followed by a quarter-point raise.
“The central bank is going to tighten more,” he said by phone from Toronto after yesterday’s decision. “They have to tighten more and they have to do it quickly if they want to control inflation”