Brazil Lifts Rate to 10.5% as CPI Defies Biggest Rate Rise

Brazil’s central bank maintained the pace of the world’s biggest interest rate increases after inflation last month surged the most in more than a decade.

The bank’s board, led by President Alexandre Tombini, voted 8-0 to raise the benchmark Selic by a half-point for a sixth straight meeting to push the key rate to 10.50 percent from 10 percent.

“They tried to make it more clear that this pace of 50 basis points will not hold for the next decisions and that the end of the cycle is near,” Tatiana Pinheiro, an economist at Banco Santander Brasil, said in a conference call with journalists after today’s decision.

Latin America’s biggest economy is facing accelerating inflation amid the worst two years of growth in more than a decade. Policy makers last year raised borrowing costs six straight times, including half-point increases at their last five meetings, in a bid to bolster business confidence and combat inflation exacerbated by a weaker real and government spending. December’s surge in consumer prices gives the central bank less leeway to slow the pace of rate increases, according to analyst Neil Shearing.

“What’s clear is that policy makers are focused squarely on inflation,” Shearing, chief emerging markets economist at Capital Economics Ltd., said by phone before today’s decision. “Growth is skewed too much toward consumption.”

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell four basis points, or 0.04 percentage point, to 10.74 percent today. The real fell 0.4 percent to 2.3594 per U.S. dollar.

Thwarting Tombini

Swaps surged the most in eight weeks on Jan. 13 as traders responded to December’s inflation report by abandoning their wagers that Brazil will slow the pace of rate increases.

At the same time, 22 analysts surveyed by Bloomberg forecast that policy makers today would raise the Selic by a half-point while 37 expected a quarter-point increase.

From a record-low 7.25 percent in April, Brazil’s policy makers in 2013 lifted the Selic by 275 basis points, which was the most among 49 economies tracked by Bloomberg.

Monthly inflation in December quickened the most since April 2003, as higher fuel costs helped prices jump 0.92 percent. Annual inflation in 2013 accelerated to 5.91 percent from 5.84 percent in 2012, thwarting pledges from Tombini that price increases would slow.

Last year’s inflation can be attributed to a weaker currency as well as pressures from the labor market and transportation industry, Tombini said in a Jan. 10 statement posted on the central bank website. The real weakened 13 percent in 2013, the worst annual decline since 2008, on speculation the Federal Reserve would unwind monetary stimulus.

Inflation Expectations

Brazil’s consumer price increases trail only Venezuela and Argentina in Latin America. Annual inflation has remained above the midpoint of the central bank’s 2.5 percent to 6.5 percent target range since September 2010.

The central bank needed to keep raising rates by a half point, as domestic and international factors pose inflationary risks, Andre Perfeito, chief economist at Gradual Investimentos, said before today’s decision.

“Policy makers have to do what they can amid doubts regarding the end of quantitative easing,” Perfeito said by phone. “Food prices also continue to be elevated in Brazil.”

Family and business sentiment has not improved in the face of persistent inflation. Consumer confidence as measured by the Fundacao Getulio Vargas fell in December to its lowest level since July, while industrial confidence was lower in December than when policy makers started raising rates in April.

Difficult Case

Cosmetics maker Natura Cosmeticos SA is among those seeing local business slow. The company is seeking to increase sales in other Latin American countries to offset moderating revenues from its core Brazilian market, Chief Executive Officer Alessandro Carlucci said in a Dec. 11 interview.

Easing up on the pace of monetary tightening as inflation accelerates would have threatened the consumer price outlook, according to Guilherme Loureiro, chief economist at UBS Brasil Cctvm SA.

“The risk of having inflation expectations come unanchored is not small,” Loureiro said by phone before today’s announcement. “In that context, the risk that inflation surpasses the top of the central bank’s target range is also not small.”

`Uncomfortably Strong'

Brazil’s economy shrank in the third quarter for the first time since 2009 on a drop in investment even after the government cut taxes on payrolls and consumer goods and announced plans to lure billions of dollars in infrastructure investment.

Retail sales in October expanded at the slowest pace in seven months, climbing at less than half the pace of September, according to the national statistics agency. Industrial production in November fell 0.2 percent from October, snapping three straight months of gains.

Even as the data indicate that the economy is slowing, it would be difficult to make the case that higher interest rates are to blame, said Capital Economics’ Shearing.

“There aren’t many signs that weak growth is caused by tight monetary conditions,” he said before today’s decision. “For example, credit growth is still uncomfortably strong.”

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