Brazil Signals Key Rate Increases Nearing End as Growth Slows

Brazil’s central bank halved the pace of key rate increases yesterday, signaling the end of its tightening cycle is near as policy makers seek to tame inflation without further jeopardizing growth.

The bank’s board, led by President Alexandre Tombini, voted unanimously to raise the benchmark Selic rate to 10.75 percent from 10.5 percent, as forecast by 44 of 61 economists surveyed by Bloomberg. Sixteen analysts expected the seventh straight half-point boost, while one forecast no change.

The decision gives “continuation” to a cycle of interest rate increases that started in April, policy makers said in a statement accompanying last night’s decision. Inflation since the tightening started has persisted above target while economists have cut their 2014 growth forecast almost in half as consumer and business confidence weaken.

“The central bank is saying we’re getting closer to the end of the cycle but aren’t quite there yet,” John Welch, macro strategist at Canadian Imperial Bank of Commerce, said by telephone from Toronto. The central bank will raise by another quarter point to safeguard for a likely increase in government-controlled prices, such as automotive fuel, he said.

The benchmark rate is now at the same level as when President Dilma Rousseff took office in 2011.

Swap rates on the contract due in April 2014, the most traded in Sao Paulo yesterday, rose one basis point, or 0.01 percentage point, to 10.6 percent. The real weakened 0.4 percent to 2.35 per U.S. dollar.

Latin America

Brazil’s central bank in the last eight meetings has lifted the key rate by 350 basis points from a record 7.25 percent. Brazil has the highest benchmark borrowing costs of central banks that set interest rates in Latin America, according to data compiled by Bloomberg.

In 23 of the 26 meetings Tombini has overseen since taking over in 2011, the central bank’s board has raised or cut rates, making it the most active among major emerging economies. He boosted benchmark borrowing costs five times and then cut them 10 times before undertaking the new series of increases in April. Brazil raised its benchmark rate the most among 49 major world economies tracked by Bloomberg last year.

Confidence levels have waned as officials have tightened monetary policy. Industrial sector sentiment in February fell to the lowest level since July, while consumer confidence the same month plunged to the lowest since May 2009.

Lowest Level

Economists in a weekly central bank survey this week cut their 2014 growth estimates to 1.67 percent. That’s the lowest level ever, down more than two percentage points from expectations of a 3.8 percent expansion from a year ago and 3.5 percent in April after tightening started.

Brazil’s industrial output in December contracted 3.5 percent from the previous month, the most in five years, as capital goods output plunged 11.6 percent.

Retail sales in the same month fell for the first time since February on declines from furniture to vehicles and auto parts.

“Growth expectations for 2014 are increasingly lower,” Andre Perfeito, chief economist at Gradual Investimentos, said by phone after yesterday’s decision. “The central bank thinks stronger tightening would further harm economic activity.”

Mexican baking products company Bimbo is among companies facing challenges in Brazil. While Bimbo is seeing an improvement in Latin America sales in 2014, it’s having difficulty expanding in Brazil, CEO Daniel Servitje said in a Feb. 21 earnings conference all.

‘Less Severe’

Brazil will cut 44 billion reais ($18.7 billion) from this year’s budget, the Finance Ministry said in a Feb. 20 statement. The spending reduction will slow inflation and cut debt while helping monetary policy be “less severe,” Finance Minister Guido Mantega told reporters in Brasilia the same day.

“The fiscal tightening was moderately positive,” Fernando Fix, chief economist at Votorantim Asset Management and the top Brazil forecaster according to data compiled by Bloomberg, said after yesterday’s decision. “But, it’s not a fiscal tightening that substitutes monetary tightening.”

Brazil’s consumer prices as measured by the IPCA index decelerated to 5.59 percent in January from 5.91 percent the month before. While inflation was still above the central bank’s 4.5 percent target, it is down from a 2013 peak of 6.7 percent in June.

Full Impact

Policy makers have been successful in slowing consumer prices, Tombini said Feb. 18. The full impact of the increases to the benchmark Selic rate hasn’t materialized yet, Tombini said.

The central bank’s reference to the beginning of the cycle in April suggests it wants to emphasize how much it has raised rates and that there are delayed effects from its policy, Jankiel Santos, chief economist at Banco Espirito Santo de Investimento in Sao Paulo, said by phone yesterday.

Brazil’s real, which fueled inflationary pressure by tumbling 13 percent against the U.S. dollar in 2013, has gained 2 percent in the past month. That increase is the third-largest among 16 major currencies tracked by Bloomberg.

“We still see very resistant inflation,” said Votorantim’s Fix. “They’re pointing to an additional interest rate increase. They’re not done yet.”

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