Brazil Extending World’s Biggest Rate Rise to Regain Credibility

Brazil’s central bank probably will raise the benchmark interest rate for a sixth straight meeting in an effort to convince investors that policy makers are serious about slowing inflation back to its target.

Policy makers led by central bank President Alexandre Tombini will lift the Selic rate to 10 percent from 9.50 percent today, according to 50 of 52 economists surveyed by Bloomberg. Two analysts expect a 0.25 percentage-point boost. The bank is scheduled to announce its decision after 6:00 p.m. local time.

Before embarking on the world’s biggest interest rate increase this year, policy makers slashed borrowing costs to a record even as consumer price increases exceeded the 4.5 percent goal. The past decisions coupled with higher public spending led investors to speculate the government had abandoned its inflation target, hurting the central bank’s credibility, former bank President Carlos Langoni said. Now, the effort to tame above-target inflation is also being undercut by a weaker currency and a widening budget gap.

“The central bank is trying to make up for past mistakes,” Langoni, who is head of the World Economic Center at Fundacao Getulio Vargas, said in an interview at his office in Rio de Janeiro. “Since they lost credibility, they probably have to overshoot the interest rate.”

Analysts forecast Tombini will fail to meet his pledge to slow inflation in 2014 from 2013 as the biggest decline amid major currencies in the past six months reignites price increases. They predict inflation will accelerate to 5.92 percent in 2014 from 5.82 percent this year, according to a central bank survey published Nov. 25.

Keep Raising

The real fell 0.2 percent to 2.2947 yesterday, extending its six-month decline to 10.4 percent. Swap rates maturing in January 2015, the most traded in Sao Paulo, fell six basis points to 10.83 percent, as traders bet policy makers will keep raising rates next year.

Faster inflation has been accompanied by slower economic growth. President Dilma Rousseff’s policies of cutting taxes, increasing subsidized credit and boosting public spending failed to restore investors’ and consumer confidence.

Analysts expect economic growth to slow to 2.1 percent in 2014 from 2.5 percent this year, according to the central bank survey. Central bankers have trimmed their 2013 growth estimates to 2.5 percent from 3.1 percent earlier this year.

Course Reversal

After reducing the Selic to a record low 7.25 percent in October 2012, the central bank reversed course in April with a 25 basis-point increase. Since then, policy makers have lifted the Selic by 50 basis points at each of the past four meetings. Brazil has raised borrowing costs the most among 49 world economies tracked by Bloomberg.

Consumer price increases have not slowed to the central bank’s 4.5 percent target during Rousseff’s entire term, which started in 2011. Annual inflation through mid-November was 5.78 percent, down from 6.67 percent in mid-June.

Brazil’s monetary policy must remain vigilant on prices, as high inflation reduces growth potential and the creation of jobs and income, Tombini said Nov. 4.

Langoni said that the combination of slow growth with fast inflation forces the central bank “to raise rates at the most difficult time.” The government has also adopted policies that have led to a deterioration of fiscal accounts, further hurting credibility.

Widening Gap

Brazil’s primary budget surplus, not including interest payments, was 1.6 percent of gross domestic product in the year through September, down from 1.8 percent the month prior and below the official target of about 2.3 percent.

Finance Minister Guido Mantega pledged on Nov. 1 to reduce the national state development bank’s loans by about 20 percent next year to shore up public finances. Officials will also end some tax breaks on consumer goods, Treasury Secretary Arno Augustin said in an interview at his Brasilia office six days later.

Inflation that is still far above target, coupled with speculation that the Federal Reserve will start slowing stimulus next year, will obligate Brazil’s policy makers to keep raising rates, according to Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA.

“The central bank doesn’t have another way out,” Rostagno said by phone. “There are risks from the weakening of the real. The inflation scenario continues to be challenging.”

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