Brazil Rate Increase Seen More Likely After Awazu Speech

Brazilian policy makers will continue with the inflation fight they started in April 2013, central bank Director Luiz Awazu Pereira said today, referring to when the country began the world’s longest tightening cycle.

After his comments, swap rates on the contract due in January 2017 extended earlier gains as traders unwound bets the central bank will keep interest rates unchanged at 11 percent this month.

“From the point of view of the central bank’s work, we are continuing to work to bring inflation to target,” Awazu, who oversees international affairs, said at an event in Sao Paulo. “We had food shocks. We had supply shocks. But we will continue this work of ours that we have started since April 2013.”

Since April last year, the central bank has lifted the benchmark Selic rate by 375 basis points to 11 percent from a record-low 7.25 percent. Awazu’s comments signal policy makers may continue tightening monetary policy as inflation persists above their target. The central bank board meets May 27-28 to decide on interest rates.

Swap rates maturing in January 2017, the most traded in Sao Paulo, rose eight basis points, or 0.08 percentage point, to 12.20 percent at 5:34 p.m. local time. The real strengthened 0.1 percent to 2.2145 per U.S. dollar.

Past Signals

Awazu in the past has signaled changes in the interest rate, including in October 2012 when he said global growth would be weak for a long period. Swap rates fell after his comments, which occurred five days before the central bank reduced the key rate to 7.25 percent on Oct. 10.

Swap rates rose today “because people thought it suggested a continuation of interest rate increases,” Joao Junior, a fixed-income trader at ICAP Brasil DTVM, said by phone about Awazu’s comments.

Annual inflation accelerated to 6.41 percent last month from 6.15 percent in March, according to the median estimate of economists surveyed by Bloomberg.

The national statistics institute is scheduled to publish its April inflation report tomorrow. Brazil’s central bank targets annual consumer price increases of 4.5 percent, plus or minus two percentage points.

“We as a central bank have a mission and we are equipped to act and ensure monetary stability, working to bring inflation close to the target in the near future,” Awazu said.

Inflation Forecast

Economists surveyed by the central bank estimate that inflation rates will reach the upper limit of policy makers’ target range in December even as the economy moderates. Gross domestic product will expand 1.63 percent this year after growth of 2.3 percent in 2013, according to about 100 analysts surveyed by the central bank on May 2.

The real, which weakened 9.4 percent in the past 12 months, will decline to 2.45 per dollar by year end, according to the analysts.

Consumer confidence in Brazil as measured in April by the Getulio Vargas Foundation fell to the lowest level since May 2009.

“We are not condemned to high inflation nor low growth,” Awazu said.

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