Brazil Keeps 11% Rate as Inflation Crimps Recession Response

Brazil kept borrowing costs unchanged for the third straight meeting as inflation persists above target and the economy struggles to emerge from recession one month before presidential elections.

The bank’s board, led by its President Alexandre Tombini, today maintained the benchmark rate at 11 percent, as forecast by 53 of 54 economists surveyed by Bloomberg. One analyst forecast a 25 basis-point cut. Policy makers voted unanimously after evaluating the outlook for growth and inflation, according to their statement. The communique omitted the phrase “at this moment” used after the bank’s last meeting in July.

The statement “reinforces the message that the central bank has no intention to move the policy rate in the short term,” Alberto Ramos, Goldman Sachs Group Inc.’s chief Latin America economist, said in a telephone interview after the decision. “Inflation is still very high and disseminated. The outlook for inflation is still challenging,” he said.

President Dilma Rousseff’s efforts to spark growth through tax cuts, social spending and expanded credit have fanned consumer prices without sustaining growth. Annual inflation has exceeded the official target of 4.5 percent for the last 48 months even after policy makers raised the Selic nine straight times through April. Brazil’s first recession in more than five years prompted economists to cut growth forecasts for this year and next as demand tumbles.

Swap rates on the contract due in January 2016, the most traded in Sao Paulo today, fell one basis point, or 0.01 percentage point, to 11.26 percent. The real strengthened 0.3 percent to 2.2369 per U.S. dollar.

Growth Concerns

Brazil’s economy contracted by 0.6 percent in the second quarter after shrinking a revised 0.2 percent during the first three months of the year, the national statistics agency said Aug. 29. Investment dropped 5.3 percent on the quarter, while services and industry also shrank.

Analysts surveyed by the central bank on the same day cut their growth forecasts for this year and next to 0.52 percent and 1.10 percent, respectively. Gross domestic product expanded 2.5 percent last year and 7.5 percent in 2010, the highest in more than two decades.

Rio de Janeiro-based Mills Estruturas e Servicios SA, which provides scaffolding and concrete forms for Brazil’s oil, shipbuilding and construction industries, is among companies that have seen sales fall short of expectations. The firm’s shares tumbled to a two-year low Aug. 7 after its second-quarter profits trailed estimates.

Bank Coherence

Demand has eased despite billions of dollars in tax cuts on items from furniture to automobiles. The central bank twice in the last six weeks lowered capital requirements to spur lending, saying the measures would increase availability of credit without spurring inflation.

“They are signaling that they are concerned about the weakness of economic growth,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone before today’s decision. “Still, looser policy isn’t what Brazil needs now. Measures that further loosen policy to stimulate credit could create risks.”

Monthly inflation in mid-August decelerated to 0.14 percent, the slowest pace in 13 months, according to the national statistics agency. While annual inflation eased to 6.49 percent from 6.51 percent a month earlier, marking the first decline in the annual rate since January.

Election Change

Current monetary policy will bring inflation toward target, Tombini told an Aug. 5 Senate hearing in Brasilia. Brazil’s inflation is under control and will remain well-behaved in upcoming months, he said.

Prospects of increases in government-controlled prices coupled with a weaker real will keep inflation expectations under pressure, according to Thais Zara, chief economist at Rosenberg Associados.

Economists in the central bank survey expect the real to drop to 2.50 per U.S. dollar by the end of 2015. A weaker currency could fan prices by making imports more expensive.

“The central bank maintained the rate at this level as a matter of coherence,” Zara said by phone before today’s decision. “There is no space for a rate change, especially with the inflation outlook. The real could lose strength.”

Recent election polls show that Rousseff is no longer the favorite in next month’s elections, as the state of the economy undermines her support.

Clear Stance

Former Environment Minister Marina Silva would win 50 percent of the votes in an Oct. 26 runoff against Rousseff, who would garner 40 percent, according to a Datafolha poll published Aug. 29. The Aug. 28-29 poll surveyed 2,874 people and had a margin of error of plus or minus two percentage points.

While the election winner will probably adjust economic measures, the central bank has signaled it has already done enough to slow prices, according to Carlos Kawall, chief economist at Banco J. Safra.

“The central bank made its view clear that, if monetary policy is kept, inflation will start converging to the center of the target,” Kawall said by phone before today’s announcement. “Without a clear indication of economic policy after the elections, they shouldn’t change the key rate.”

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