Brazil Signals End to Low-Rate Pledge Amid Faster Inflation
Brazil Holds Key Rate at 2% With Economic Recovery on the Line
(Bloomberg) -- Brazil’s central bank signaled it may be unable to fulfill its pledge to keep interest rates at a record low for long due to rising inflation expectations.
The bank, led by its President Roberto Campos Neto, on Wednesday held the benchmark Selic rate at 2% for the third straight meeting but said inflation expectations for the next two years are rising toward the target. That means conditions for keeping borrowing costs low may soon not be met, it added.
That “does not mechanically imply interest rates increases, since economic conditions still prescribe an extraordinarily strong monetary stimulus,” bank board members wrote in a statement accompanying their decision.
Consumer prices in Latin America’s largest economy have risen faster than investor expectations for three months amid unrelenting jumps in food and transportation costs. While policy makers have stuck to their message that such pressures are temporary, some economists have urged the central bank to strike a tougher stance on inflation.
Read more: Brazil Analysts Call on Central Bank to be Tougher on Inflation
“The central bank’s statement was clearly more hawkish,” said Alberto Ramos, chief Latin America economist at Goldman Sachs. “Key rate increases are coming. They aren’t imminent, but they were already commissioned.”
Consumer prices rose 4.31% in November from a year ago, compared with targets of 4% for this year and 3.75% for 2021. A central bank inflation forecast considering constant interest and exchange rates shows consumer prices below target next year but well above its goal in 2022.
Swap rates on the contract due in January 2022, which indicate investor expectations for monetary policy, rose seven basis points to 3.105% in morning trading on Thursday. The real gained 0.9% to 5.1228 per dollar.
Challenging Recovery
Still, policy makers are unlikely to rush to raise borrowing costs given the fragile state of the economy. Gross domestic product growth disappointed in the third quarter, and the recovery has since become more challenging.
Fiscal constraints are forcing the government to end monthly stipends that boosted demand during the pandemic. Meanwhile, unemployment has climbed to an all-time high and the services sector continues to lag.
“What surprised me was the central bank’s timing,” said Gustavo Arruda, chief economist at BNP Paribas. “With the end of monthly stipends, economic activity in the first and second quarter next year will be very weak.”
Weaker economic data have been emerging as regions including Sao Paulo -- Brazil’s richest and most populous state -- are starting to reimpose restrictions on commerce in response to a jump in virus cases. Brazil has recorded over 6.7 million infections and 178,000 deaths since the start of the pandemic in one of the world’s worst outbreaks.
Preparation
Brazil’s inflation outlook has gotten a recent boost from the real, which has risen nearly 6% in the past month, leading gains among emerging market currencies. Gains in the local currency help to make imported goods less expensive.
In its statement, the central bank board wrote that recent consumer price readings were higher than expected and inflation will remain pressured at least through December. At the same time, they added, various measures of underlying inflation are compatible with meeting target over a relevant horizon for monetary policy.
Even before the rate decision, economists surveyed by the central bank already expected policy makers to raise the Selic to 3% by end-2021.
“There is certainly preparation for an increase in interest rates,” said Solange Srour, chief economist at Credit Suisse Brasil. “There is an emphasis on projections and expectations for 2022.”
©2020 Bloomberg L.P.