Brazil Keeps 14.25% Rate Amid Political Turmoil, Recession

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  • Decision comes hours after historic impeachment of president
  • Swap traders expect next move to be a reduction by year-end

Brazil kept borrowing costs unchanged for the ninth straight meeting on Wednesday, as policy makers grapple with a deepening recession, stubborn inflation and the fallout from a presidential impeachment trial.

The central bank’s board, led for the second time by its new chief, Ilan Goldfajn, unanimously voted to maintain the so-called Selic rate at a 10-year high of 14.25 percent. All 45 analysts surveyed by Bloomberg correctly forecast the decision. Traders in the swaps market expect policy makers to cut rates by year-end for the first time since 2012.

The decision comes amid an unprecedented economic and political crisis. On Wednesday, the Senate voted to permanently remove President Dilma Rousseff from office, capping an almost nine-month impeachment process that polarized Congress and the country. And earlier Wednesday, a government report showed the economy shrank for a sixth straight quarter in the three months through June, as the worst recession in decades shows few signs of easing.

For a look at the impact of impeachment, click here

“There are lots of things happening right now, and it makes sense to put rates on hold until they have further information,” said Roberto Padovani, the chief economist at Banco Votorantim, a Brazilian bank.

Michel Temer, who succeeds Rousseff, now faces the difficult job of fixing an economy marked by declining retail sales, a drop in industrial production, a near-record budget deficit and above-target inflation. Shortly after assuming the presidency on an interim basis in May, he appointed what Goldman Sachs Group Inc. dubbed a "dream team" of economic experts to his cabinet, tasking them to revive confidence and contain inflation.

Goldfajn kicked off his tenure as Temer’s central bank chief on several different notes. He started the July gathering two hours earlier than his predecessor, and announced the rate decision online. The central bank’s chief spokesman had traditionally unveiled the new rate live to reporters in Brasilia.

He has taken a proactive stance on the real as well, offering reverse foreign-exchange swaps in a bid to weaken the currency. The real’s 23 percent gain against the dollar this year is hurting exporter margins and could threaten the country’s recovery.

The currency’s appreciation hasn’t helped damp consumer prices, which rose 0.52 percent in July from the previous month to push the annual rate to 8.74 percent. With inflation at almost double the official target of 4.5 percent, Goldfajn has made it clear there is no immediate room for a reduction in the benchmark interest rate.

Many economists are optimistic Goldfajn can succeed in bringing inflation closer to target, and expect he eventually will have the luxury of cutting rates. Analysts surveyed weekly by the central bank expect borrowing costs to drop by 50 basis points to 13.75 percent this year before reaching 11.25 percent in 2017. They also estimate GDP will rebound next year.