Brazil Doubles Pace of Rate Increase to Meet Inflation Vow

Brazil doubled the pace of the interest rate increases as the government of re-elected President Dilma Rousseff pledges to slow inflation to its 4.5 percent target, a level unseen for more than four years.

The bank’s board, led by its President Alexandre Tombini, voted unanimously today to raise the benchmark Selic by half a point to 11.75 percent after a quarter-point increase Oct. 29, as forecast by 31 of 55 economists surveyed by Bloomberg. Twenty-four analysts forecast a quarter-point increase.

Policy makers said they decided to “intensify at this moment the adjustment of the Selic” and that they consider that “the additional monetary policy effort has a tendency to be implemented with parsimony,” according to their statement posted on the central bank’s website.

Rousseff has promised an “immense effort” to contain inflation after winning elections in October by the tightest margin since at least 1945. Faster consumer prices coupled with the widest budget deficit in more than a decade have slowed growth and threaten the nation’s investment grade status. Her incoming finance minister, Joaquim Levy, vowed to contain spending to regain investor trust and help rein in price increases.

“This is all part of a shift in economic policy for Dilma’s second term to measures that would boost credibility,” said chief economist at Banco Safra, Carlos Kawall.

Above Limit

Consumer prices rose 6.59 percent in November, above the upper limit of the central bank’s 2.5 percent to 6.5 percent target range for the fifth month this year, according to the median estimate of 35 economists surveyed by Bloomberg. The national statistics agency is scheduled to release the data on Dec. 5.

Analysts predict inflation will slow to 6.3 percent in December and rebound to 6.5 percent next year. They see consumer prices increasing 5.85 percent in 2016.

Tombini said on Nov. 8 that policy makers were working to bring inflation back to 4.5 percent over the next two years. He surprised analysts in October by ending a five-month pause in interest-rate increases to ensure a more benign inflationary outlook.

The real’s 10.7 percent decline in the past six months, the fourth-worst performance against the dollar among major currencies, further complicates the central bank’s fight against inflation, Kawall said. Brazil’s currency gained 0.6 percent to 2.5532 per dollar today and could drop to as low as 2.80, further fueling price increases, he said.

“We have high inflation expectations that aren’t compatible with the target,” Guilherme Maia, an economist at Votorantim Ctvm Ltda, said by phone from Sao Paulo. “In that sense, fiscal and monetary policy must be more orthodox”.

Second Term

Rousseff vowed her second term will be marked by a “rigorous” control of inflation and policies that will bolster growth, according to a letter sent Dec. 2 to participants at JPMorgan Chase & Co.’s Brazil Opportunities Conference in Sao Paulo.

Latin America’s largest economy will expand 0.3 percent this year, the slowest pace since the recession of 2009 and short of the Latin American average for the fourth straight year, according to analysts surveyed by Bloomberg.

Slowing growth and deteriorating fiscal results led Standard & Poor’s to cut the country’s sovereign debt rating to one level above junk. In September, Moody’s Investors Services followed by cutting Brazil’s Baa2 credit rating outlook to negative.

“At this moment, economic policy has to win back its credibility, the efforts have to be made in various channels, monetary and fiscal,” Luciano Rostagno, chief strategist at Banco Mizuho do Brasil SA, said by phone from Sao Paulo.

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