Brazil set to hike rates again

Published May 29, 2013


Brasilia - Brazil is likely to hike interest rates for the second straight meeting on Wednesday, but the market remains divided on whether policymakers will maintain the pace of tightening during a timid recovery or accelerate it to curb high inflation.

A slight majority of analysts are betting that Brazil's central bank will be more aggressive and hike its benchmark Selic rate to 8 percent from 7.5 percent, according to a Reuters poll.

The rest believe policymakers will opt for a cautious 25-basis-point increase to 7.75 percent, repeating the dose from April's monetary policy meeting.

It is a difficult choice for central bank chief Alexandre Tombini, who is under pressure to act more decisively to anchor high inflation expectations. At the same time, though, Tombini must administer the rate hikes with caution to avoid tripping up an economy on the rebound.

The magnitude of Wednesday's rate hike will most likely hinge on economic growth data from the first quarter due out earlier in the day. Weak economic expansion will raise pressure on policymakers to maintain the pace of tightening. Stronger growth will give them room for a steeper increase.

The economy likely grew 0.9 percent in the quarter from the previous one, according to a Reuters poll of 31 economists.

Tombini has signaled he may step up the tightening cycle, dropping previous references to “cautious” rate hikes and instead adopting more incisive language, saying the central bank will “do what is necessary, in a timely manner” to slow inflation.

“If the central bank is indeed concerned about reining in inflation expectations, the pattern of dovish surprises has to end someday and now seems to be the appropriate time,” Mario Mesquita, a former central bank director who is now chief economist at local investment bank Brasil Plural, wrote in a research note.

Others, however, interpreted Tombini's recent comments as a mere reiteration of his pledges to tame inflation, citing the last rate decision, when markets erroneously expected the bank to opt for a more aggressive rate increase.

That hesitation is also mirrored in the bets of market traders with the yields of interest rate future contracts pricing a 56 percent chance of a half percentage rate hike versus 44 percent for a 25-basis-points increase, according to Thomson Reuters calculations.

Brazil is one of the few major world economies currently raising interest rates as strong demand, high production costs and infrastructure bottlenecks keep inflation closer to the upper end of an already high official target range.

After slashing a staggering 525 basis points off the Selic in just over a year to record lows, the central bank decided in April to change tack in a bid to ease a surge of inflation that pierced the target's ceiling that month.

Naggingly high inflation threatens to foil President Dilma Rousseff's crusade to shore up the once-booming Brazilian economy before she is up for re-election next year.

Annual inflation slowed to 6.46 percent in the month to mid-May, just a shade below the target range ceiling of 6.5 percent but way above the bank's self-proclaimed goal of 4.5 percent.

Even as inflation in Brazil remains resilient, the central bank cited the sluggish global economy and weaker commodity prices as reasons behind the smaller rate hike in April.

Two of the eight members of the bank's monetary policy committee, known as Copom, voted to keep rates steady at its April 17 meeting citing slow global growth as positive for local price dynamics.

“We believe the Copom's strategy remains that of delivering the smallest possible tightening cycle that would anchor inflation expectations within the upper bound of the target range,” economists at Barclays Capital said in a research note that calls for a 25-basis-points rate hike. - Reuters

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