Brazil Traders Ignore Tombini as 16.25% Selic All But Inevitable

  • Real's plunge threatening to fan already high inflation
  • Boosting rates may exacerbate worst recession in 25 years

The more Alexandre Tombini says he’s not raising interest rates, the more traders ratchet up bets he will. 

The central bank president reiterated as recently as Sept. 24 that benchmark borrowing costs at 14.25 percent -- already the highest since 2006 -- will be enough to quell inflation that’s running at more than double the official target.

But with the collapse of the Brazilian currency prompting investors and analysts to brace for a surge in the cost of living, Tombini’s promise to hold the line on rates is proving an all but impossible sell. In the swaps market, traders now predict Tombini will have to boost the key Selic rate to 16.25 percent. That threatens to compound an economic swoon that’s already the worst in a quarter century.

“Raising rates always happens in this scenario,” James Gulbrandsen, chief investment officer for Latin America at asset manager NCH Capital, said. “It becomes a simple question: how much drama and pain do you want?”

Brazil's DI curve has flipped over the past two months

The central bank declined to comment on evaluations of financial market analysts regarding central bank communication and outlooks for monetary policy.

Policy makers will consider a marginal increase in borrowing costs if the government fails to shore up Brazil’s fiscal accounts, said a member of embattled President Dilma Rousseff’s economic team Wednesday. It’s premature to change the strategy of keeping rates unchanged before there is a clearer picture of the country’s budget situation, the official, who asked not to be named because the discussions aren’t public, said.

Brazil’s real has plunged 33 percent this year, the most in emerging markets, as Rousseff struggles to win support for austerity measures to restore the nation’s finances and to pull Latin America’s biggest economy out of what analysts say will be the longest recession since the 1930s. The currency sank to a record low last month after Standard & Poor’s cut Brazil’s credit rating to junk, the third downgrade during Rousseff’s nearly five-year tenure.

With the real’s slide making imports more expensive, there’s now a “big chance” inflation exceeds the central bank’s official 6.5 percent ceiling for a second straight year in 2016, according to Rodrigo Melo, chief economist at asset manager Icatu Vanguarda. He’s been the top benchmark inflation forecaster in Brazil since last year, according to a central bank survey.

Top 5 forecast rose faster than median as currency tumbled

While consumer prices soared 9.5 percent in August from the year earlier, Tombini has said the rate will fall to the central bank’s 4.5 percent target by the end of 2016.

“We have to know how much de-anchoring the central bank will allow,” Melo said at his office in Rio de Janeiro.

Adam Slater, lead economist at Oxford Economics Ltd., isn’t taking Tombini’s pledge to leave rates at their current levels at face value. He says there’s a 30 percent chance the central bank will lift rates to at least 17.25 percent in one fell swoop in coming weeks.

“A central banker would never tell you if he were going to do something like this,” Slater said by phone from London. “It’s the last thing that he would tell you. And obviously he doesn’t want to have to do it.”

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