Brazilian Real Extends Gains After ‘Sharp’ Rate Hike Pledge
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The Brazilian real advanced after the central bank lifted its benchmark rate by 75 basis points and promised another hike of the same size next month in a renewed push to bring inflation back to target.
The currency was up 1.3% to 5.2853 per dollar as of 12:43 p.m. in New York, among the best performers in emerging markets. The real leads gains among major currencies in the past month, up 5.9% amid rising commodity prices, and analysts say the central bank decision opens room for more gains.
Officials on Wednesday raised the Selic to 3.5%, in line with estimates from all economists in a Bloomberg survey and the guidance given by policy makers at their prior meeting in March. If it makes good on its promise, the bank will have raised borrowing costs by 225 basis points to 4.25% by June.
“This more hawkish statement should bring short-term strength to the BRL,” Rabobank economists Mauricio Une and Gabriel Santos wrote in a note. “We had thought they would not signal the following step hike now.” They expect the central bank to raise rates to 5.5% by the end of the year and to 6.5% in 2022.
The bank, led by its President Roberto Campos Neto, is acting to rein in inflation that’s surged above the target ceiling to a four-year high. Food and fuel costs have jumped in recent months, and the government recently restarted emergency aid that will firm up demand. Put together, analysts see consumer prices above target this year and next amid an incipient recovery.
What Bloomberg Economics Says
“The central bank tried to reach a compromise: it promised another sharp rate hike of 75 basis points in the next meeting, but warned that it is not ready yet to fully normalize monetary policy. Despite acknowledging the decline in underlying inflation and mentioning -- for the first time ever -- its dual mandate, we believe that the overall tone of the statement was somewhat hawkish.”
--Adriana Dupita, Latin America economist
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Real Has Scope to Gain After BCB’s Hiking Signal: Inside Brazil
“They are continuing the hawkish tilt,” said Sacha Tihanyi, head of emerging market strategy at TD Securities in Toronto. “Hike aggressively sooner, and then create some breathing space for the real.”
The central bank also reinforced that a “partial normalization of the policy rate remains appropriate to keep some degree of monetary stimulus during the economic recovery.”
That suggests they don’t see the key rate climbing in this cycle to a neutral level that’s commonly pegged around 5.5%-6.5%.
“However, the Committee emphasizes that there is no commitment with this plan, and that future steps of monetary policy could be adjusted to assure the achievement of the inflation target,” officials wrote in the statement.
The swap rates curve fell 4 to 8 basis points, flattening after a low volatility open. Traders held onto their bets that the central bank will raise rates by another 275 basis points by the end of the year, which would take the benchmark to 6.25%. BNP Paribas on Thursday revised its forecast for the Selic to 6.5% from 5% saying rising inflation will lead officials to raise rates by more than expected.
For the first time, policy makers mentioned their secondary mandate of fostering full employment, introduced in the same law that gave the bank its long-sought formal autonomy earlier this year. Yet they offered a positive outlook, saying recent economic indicators have been better than expected despite the pandemic, and predicting uncertainties over growth to gradually return to normal.
Last month, President Jair Bolsonaro’s administration started paying out another round of monthly stipends at a total cost of 44 billion reais ($8.2 billion). Lawmakers have recently indicated they will seek an extension of that aid if the government does not accelerate plans for a new social program as the coronavirus continues to spread through the country.
Consumer prices rose 6.17% in the year through mid-April, and many economists see that reading approaching 8% in May. The central bank targets annual inflation at 3.75% this year, with a tolerance range of plus or minus 1.5 percentage points.
In their statement, policy makers wrote various measures of underlying inflation are already at the top of the range compatible with hitting their target. Complicating matters, commodity prices continue to increase, and higher energy costs are pressuring prices in the short-term.
“The central bank is signaling it plans to get to a 5% Selic in 75-basis point hikes, though it leaves the space to change its mind,” said David Beker, chief Brazil economist at Bank of America Corp.
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