Analysts See Brazil Balking at Higher Rates Even as Prices Surge

  • Focus survey shows borrowing costs ending 2016 at 14.25%
  • Survey also shows economy contracting more than 3% this year

Analysts expect Brazil to keep the key interest rate unchanged at year-end even as consumer prices surge, as a growing number of economists and traders question the central bank’s commitment to slowing inflation.

Benchmark borrowing costs will end 2016 at the current level of 14.25 percent, down from a prior forecast of 14.64 percent, according to the central bank’s weekly Focus survey of analysts. They also raised their inflation forecast for this year to 7.26 percent, which exceeds the official target of 4.5 percent.

The central bank’s credibility may have taken a hit last month when it kept the interest rate unchanged for a fourth straight meeting, surprising economists and traders who expected it to start hiking amid double-digit inflation. The decision raised questions of political interference, after key members of the government’s ruling coalition put pressure on policy makers to protect the economy and refrain from monetary tightening.

Policy makers defended their decision in minutes to the meeting published last week, saying the domestic downturn and weaker demand in China will help damp inflation.

Economists in Monday’s survey forecast a contraction of more than 3 percent this year. That would mark the first back-to-back recession in Brazil since 1930 and 1931, according to data from national economic research institute IPEA that dates back to 1901. If economists’ predictions are correct, 2015 and 2016 would be the only time on record the economy contracted more than 3 percent for two straight years.

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