Brazil Signals Rate Unlikely to Fall as Prices Persist

Brazil’s central bank signaled it is unlikely to follow regional peers in cutting interest rates as above-target inflation persists. Swap rates increased.

“The committee anticipates an outlook which sees inflation being resistant in upcoming quarters,” the central bank board said in the minutes of its July 15-16 meeting. Inflation tends to converge to target toward the end of the policy horizon “taking into account a strategy that doesn’t consider a reduction in the monetary policy tool.”

Policy makers led by bank President Alexandre Tombini voted unanimously last week to hold the benchmark interest rate at 11 percent for the second straight meeting after raising it 375 basis points in the 12 months through April. Monetary policy needs to remain “especially vigilant,” officials said in the minutes published online today.

President Dilma Rousseff is being squeezed by faster inflation and a slowing economy as she campaigns for re-election in October. Analysts expect growth this year to be the slowest since the 2009 economic crisis as confidence stagnates and consumption weakens. The central bank forecasts inflation will accelerate further above the upper limit of its target range after reaching a 13-month high in mid-July.

‘Very Clear’

“The central bank was very clear and direct in ending any doubt about changing monetary policy with inflation running near the top of the target,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by telephone today.

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose three basis points, or 0.03 percentage point, to 10.77 percent at 9:59 a.m. local time. The real was practically unchanged at 2.2193 per U.S. dollar.

The central bank on July 16 kept borrowing costs on hold after boosting them for nine straight meetings through April to combat inflation. Brazil has the highest benchmark borrowing costs among rate-setting nations in the Group of 20, and has taken the opposite tack from countries such as Mexico and Chile that have cut interest rates in the past year to boost growth.

Brazilian inflation in the year through mid-July jumped to

6.51 percent even as a drop in airline fares prompted monthly price increases to slow to 0.17 percent from 0.47 percent. Annual inflation has remained above the midpoint of the central bank’s 2.5 percent to 6.5 percent target range since Rousseff took office in January 2011.

Consumer Price

Consumer price increases will reach 6.6 percent in the third quarter before slowing to 6.4 percent in December, the central bank said June 26, assuming a benchmark rate steady at 11 percent. That would be the fastest year-end rate since 2011.

“Any rate cut within the next few months would represent a lack of commitment to inflation,” Enestor Dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria, said by phone. “The central bank was more explicit than normal. It is an attempt to recover credibility and anchor long-term expectations.”

Economists surveyed weekly by the central bank on July 18 cut their 2014 growth estimate to 0.97 percent, half the pace forecast for this year on Jan. 3. That would be the worst performance since 2009, when gross domestic product shrank.

Those revisions have coincided with falling industrial confidence, which dropped for the fourth straight month in July. While consumer confidence rose in June, the reading remains near a five-year low.

‘Quite Explicit’

Weak economic performance probably will force the central bank to consider cutting rates by September, Cristiano Romero, a columnist at newspaper Valor Economico, wrote earlier this week, citing a government official he didn’t identify by name.

“The central bank was quite explicit in informing that it doesn’t have plans to reduce rates, thus ending the noise in the market,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone.

Banks such as Itau Unibanco Holding SA and Credit Suisse Group AG estimate Brazil’s economy shrank in the second quarter amid weak business sentiment. Brazil’s economy expanded 0.2 percent in the first quarter, half the pace posted in the last three months of 2013.

“The pace of domestic activity tends to be less intense this year compared to 2013,” according to the minutes. “Consumption tends to grow at a more moderate pace than observed in recent years.”

More productivity is the only way to get Brazil’s economy on track, Rousseff told reporters July 11 in Brasilia. She said productivity will increase in a possible second term after she focused on boosting investments in her initial time in office.

The central bank on June 26 cut its 2014 GDP growth estimate to 1.6 percent. Brazil’s GDP rose 2.5 percent in 2013.