Tombini Says Brazil Rate Decision to Weigh Deeper Recession

  • Head of central bank says IMF growth revisions signficant
  • Swap rates drop as traders pare key rate increase bets

Central bank President Alexandre Tombini said policy makers will take into account the International Monetary Fund’s forecast of a deeper recession in Brazil when they meet this week to decide on interest rates. Swap rates plunged.

The IMF predicts Latin America’s biggest economy will contract 3.5 percent this year and stagnate in 2017, according to a report published Tuesday. The institution previously saw the economy shrinking 1 percent this year and growing 2.3 percent in 2017.

“Central bank President Alexandre Tombini considers as significant the revisions of growth projections for Brazil in 2016 and 2017 carried out by the International Monetary Fund,” the central bank said in a statement Tuesday. “President Tombini highlights that all relevant economic information available up to the Monetary Policy Committee meeting is considered in the decisions of the board.”

Brazil’s central bank is caught between above target inflation and prospects of a multi-year economic recession. Policy makers, who have held borrowing costs at the highest level since 2006, have seen their efforts to control inflation jeopardized by a weaker currency, loose fiscal policy and political uncertainty.

Swap rates maturing January 2017 had its biggest drop in two months as traders pared bets the central bank will aggressively raise the rate Wednesday. The contract fell 31 basis points to 15.29 percent at 10:05 a.m. local time.

Tombini’s statement "increases the chance that there won’t be a 50 basis-point hike,” Flavio Serrano, senior economist at Haitong Bank, said in telephone interview. “The market had completely priced in such a move, and this statement is adding uncertainty."

The central bank usually refrains from making comments about monetary policy on the eve of its rate-setting meetings. Tuesday marks the first day of the board’s two-day deliberations on the country’s benchmark rate.

Of the 39 economists surveyed by Bloomberg, 29 expected the central bank to raise the Selic by 50 basis points on Wednesday. Three of them expected a 25 basis-point boost while seven forecast it to remain at 14.25 percent.

Tombini has pledged to slow Brazil’s annual inflation from 10.67 percent in December to its 4.5 percent target by the end of 2017. Analysts surveyed by the central bank expect consumer prices to breach the current 6.5 percent upper limit of the inflation target band for the second straight year in 2016.

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