Brazil to Extend Record Rate Lift as Price Outlook Worsens

Brazil’s central bank probably will increase the benchmark interest rate for a fifth straight meeting as a weaker currency threatens to stoke inflation and undermine the world’s biggest tightening cycle.

Policy makers led by central bank President Alexandre Tombini will raise the benchmark Selic rate to 9.50 percent from 9 percent today, according to all 49 economists surveyed by Bloomberg. Central bankers have raised borrowing costs by 175 basis points, or 1.75 percentage points, since April, the most this year among 49 world economies tracked by Bloomberg. The bank is scheduled to announce the decision after 6:00 p.m. local time.

The real’s decline in the past six months, the biggest among major currencies, has prompted analysts to boost forecasts for consumer price increases as imports become more expensive. Tombini pledges to ensure inflation, which has remained above the 4.5 percent midpoint of the target for three years, slows next year. Analysts predict he will fail and inflation will quicken.

“The central bank is behind the curve in trying to contain inflation expectations and future inflation,” Paulo Vieira da Cunha, who was a member of the central bank’s board from 2006 to 2008, said in a phone interview. Policy makers “are concerned inflation may breach the 6.5 percent ceiling.”

Increasing the benchmark interest rate by half a percentage point as in the previous three meetings will prevent the central bank from further losing credibility, said Cunha, who is a partner at Tandem Global Management LP.

Faster Inflation

Analysts polled weekly by the central bank forecast inflation will accelerate to 6 percent in 2014 from 5.8 percent in 2013, according to the latest survey published Oct. 7. On April 19, two days after the tightening cycle started with a quarter-point increase, economists estimated consumer prices would rise 5.7 percent this year and next.

Inflation slowed for the third consecutive month in September to 5.86 percent, the national statistics agency said today. Still, consumer prices rose 0.35 percent in the month as transportation, clothing and housing fueled the biggest increase in four months.

Policy makers last month increased their 2014 inflation forecast to 5.7 percent from 5.2 percent, basing their estimate on analysts’ forecasts that the Selic will rise to 9.75 percent.

The Minimum

That would be the “minimum” interest rate needed to ensure inflation hovers around 6 percent, given there is no sign the government plans to contain spending next year when Brazilians vote for president, Marcelo Salomon, co-head for Latin America economics at Barclays, said by phone from New York. Brazil targets inflation of 2.5 percent to 6.5 percent.

Finance Minister Guido Mantega’s 2014 budget proposal entails spending 1.04 trillion reais ($470 billion), a 12 percent increase from expenditures approved by lawmakers for this year.

President Dilma Rousseff’s administration has sought to spur the economy also by attracting billions of dollars in infrastructure investments, boosting subsidized lending and extending payroll tax cuts.

Gross domestic product climbed 1.5 percent in the second quarter from the previous three months, the fastest expansion since 2010 and above the median estimate of 0.9 percent growth from analysts polled by Bloomberg. GDP had increased less than forecast in the previous five quarters.

The International Monetary Fund cut yesterday Brazil’s 2014 growth estimate to 2.5 percent from 3.2 percent. It forecast South America will expand 3.1 percent.

Swap Rates

Rates on swap contracts due in January 2015 increased 1.45 percentage points to 10.08 percent yesterday from April 17 when policy makers first raised borrowing costs this year.

“Policy makers want to do what they can to reassert their inflation fighting credentials,” Neil Shearing, chief emerging market economist at Capital Economics Ltd, said by phone.

The real, which has depreciated 10.4 percent in the past six months, fell 0.3 percent to 2.211 per U.S. dollar yesterday. The currency has gained 10.1 percent since Aug. 22, when the central bank announced a $60 billion program of swaps and credit line auctions to prevent the real from weakening further and driving up the price of imports.

“The central bank wants next year’s inflation to be lower than this year’s,” Enestor Dos Santos, principal economist at BBVA and the top ranked Selic forecaster according to data compiled by Bloomberg, said by phone. “They are not going to adopt a more dovish tone at this time.”

Before it's here, it's on the Bloomberg Terminal.