Brazil Central Bank Signals Continued Pace of Rate Increases

Brazil Central Bank Signals Continued Pace of Rate Increases

By Mario Sergio Lima Raymond Colitt/Bloomberg

9:08 AM BRT
May 7, 2015

Brazil’s central bank said it needs to do more to bring consumer price increases back to their target by the end of next year. Swap rates rose.

“The gains achieved in the fight against inflation — exemplified by benign signs stemming from medium and long-term outlook indicators — aren’t yet sufficient,” policy makers said Thursday in the minutes to their April 28-29 meeting.

The central bank board, led by its President Alexandre Tombini, voted unanimously last week to lift the benchmark interest rate by 50 basis points to 13.25 percent. Following five straight increases, borrowing costs are at their highest since January 2009.

Traders increased their bets for another half-point increase in the central bank’s rate decision in June. Swap rates on the contract due in January 2017, the most traded in Sao Paulo on Thursday, rose 13 basis points, or 0.13 percentage point, to 13.63 percent at 11:04 a.m. Sao Paulo time.

The balance of risks for inflation in 2015 has become “unfavorable,” according to the central bank. Board members said they need to limit to this year the impact of a weaker currency and increases to government-regulated prices.

Unlike the previous minutes, policy makers on Thursday made it clear that they seek to bring inflation to the 4.5 percent center of the target range by the end of next year, Alberto Ramos, chief Latin America economist at Goldman Sachs in New York, said.

‘Assertive’ Bank

“The minutes seem more consistent with another 50, rather than a 25 in June,” Ramos said. “The inflation dynamics required an assertive central bank and they’re showing that assertiveness.”

Annual inflation in mid-April accelerated to 8.22 percent, marking the fastest pace in more than a decade and exceeding the central bank’s target range of 2.5 percent to 6.5 percent for the fourth straight month.

Economists surveyed weekly by the central bank see the cost of living rising 8.26 percent in 2015 and 5.6 percent next year.

While policy makers are signaling a half-point rate increase in June, it’s increasingly probable the board will reexamine that pace on evidence that the economy is slowing and inflation is becoming more benign, said Flavio Serrano, senior economist at BESI Brasil.

“If the facts don’t change, it signals a new increase of 50 points,” he said. “We still have a scenario of 25 points because we believe there will be changes before the June meeting.”

Economists in the central bank survey forecast the economy will shrink 1.2 percent in 2015, leading policy makers to cut the key rate to 11.5 percent next year.