Brazil Central Bank Indicates Tightening Cycle Might Be Nearing an End
Scenario for inflation to converge with official target in 2016 has strengthened, bank’s minutes say
PAULO TREVISANI And ROGERIO JELMAYER
Updated March 12, 2015 12:52 p.m. ET
Wall Street Journal
BRASÍLIA—Brazil’s central bank said on Thursday that it expects inflation pressures to ease next year, which analysts think could mean that the bank’s two-year cycle of rate increases might be nearing an end.
Despite continuing price pressures from the weakening of the local currency, the real, and the rise of government-set prices, the outlook for inflation next year has improved, the bank said in the minutes from last week’s monetary policy committee meeting that were published on Thursday.
“The bank’s decision at its next meeting will focus on the exchange rate and on economic activity, because it has admitted there’s not much it can do (about inflation) in the short term,” said Flavio Serrano, an economist at BES Investimentos do Brasil in São Paulo. “I think we are marching towards the end of the rate increases.”
Although the bank expects inflation pressures to ease next year, it also expects the 12-month inflation rate to remain “elevated” during 2015.
The bank “judges that the scenario for inflation to converge with the (official target of) 4.5% in 2016 has strengthened,” the minutes said, though the same paragraph also said that efforts to fight inflation haven’t yet been sufficient.
And while labor-market pressures are cooling off, high employment levels and relatively strong salary increases remain a threat to inflation-fighting policies, the bank said.
Last week, the central bank raised its benchmark interest rate, known as the Selic, to 12.75% from 12.25%, extending a tightening cycle that started in April 2013, was briefly interrupted last year and then resumed in October.
Brazil’s 12-month inflation reached 7.7% in February, up from 6.5% when the tightening began in 2013. The bank’s target for inflation is 4.5%, with a two percentage-point tolerance range in either direction.
The country’s attempts at curbing inflation haven’t been enough so far, the bank said, leaving observers unsure about whether the Selic will move to 13% or to 13.25% in the next rate-setting meeting, late next month.
“The door is open to either a quarter-point or a half-point increase, but I believe a quarter point is more likely,” Mr. Serrano said.
The uncertainty over the size of the next rate increase is the central bank’s way to keep its options open, depending on how Brazil’s economic indicators evolve meanwhile, said Alberto Ramos, from Goldman Sachs in New York, in a report to clients.
“The central bank decided to maintain a certain constructive ambiguity…likely waiting for more information” ahead of its next meeting, he said.
The bank’s efforts to slow price increases have been reinforced lately by government actions. Finance Minister Joaquim Levy has promised to deliver a primary surplus—a measure of government savings before interest payments—equal to 1.2% of gross domestic product this year.
The surplus would be a reversal of last year’s primary deficit of 0.63% of GDP.
Government spending can add to inflationary pressures, so curbing public outlays can help rein in price increases.
The government is also cutting back on subsidized loans to individuals and corporations, reversing a policy used to try to pump up the economy in the past few years at a heavy cost to taxpayers.
Mr. Levy is also reversing a practice of holding the Brazilian real relatively strong against the dollar as a way to keep import prices from boosting inflation. The currency was trading at 3.10 reais to the dollar Thursday morning, compared with 2.35 reais to the dollar a year ago.
The central bank’s minutes said that a declining currency, combined with economic recovery in export markets, “works to make (the external scenario) more benign for Brazilian economic growth,” as both factors should help boost Brazilian exports.