Brazil Central Bank Head Goes All-In With Bold Rate Hike Plan
(Bloomberg) -- For Brazil’s central bank chief Roberto Campos Neto, it was time for a swift change of course.
With inflation expectations quickly deteriorating, Campos Neto not only delivered the biggest interest rate increase in more than a decade but also signaled for the next meeting another hike of the same magnitude: 75 basis points, which boosted the Selic to 2.75% on late Wednesday and will likely take it to 3.5% in May.
The move surprised all but one of the 42 economists surveyed by Bloomberg -- most of them expected a half-point increase -- and is likely to support the Brazilian currency, which has suffered amid investor concerns about excessive government spending. It also showed the central bank’s independence from a recent interventionist shift by President Jair Bolsonaro.
Just a few months ago, policy makers were still committed to keeping borrowing costs at an all-time low of 2% for the “foreseeable future” as the pandemic caused a historic decline in economic activity. They dropped that pledge in January and now say the “extraordinary” level of monetary stimulus can no longer be sustained, even as the recovery falters amid a new and devastating wave of the coronavirus.
“In the Committee’s evaluation, a swifter adjustment has the benefit of reducing the probability of not meeting the inflation target in 2021, as well as of keeping longer horizon expectations well anchored,” policy makers wrote in the statement accompanying their unanimous decision.
It’s the biggest test yet for the inflation-fighting credentials of Campos Neto, a former treasury executive at Banco Santander SA who took the reins of the central bank in 2019. The cost of commodities such as oil is rising, and fiscal concerns are weakening the real and adding to price pressures. Analysts surveyed by the central bank have raised their 2021 inflation calls for 10 straight weeks despite the economic blow from the virus.
“Policy makers are trying to get ahead of rapidly building inflation risks and the threat of an increase in fiscal risk premium in the real,” said Sacha Tihanyi, head of emerging Market Strategy at TD Securities. “A more aggressive trajectory is thus warranted in their view.”
Bold Hike Puts Central Bank Ahead of the Curve: Inside Brazil
The decision makes Brazil the first Group of 20 nation to raise borrowing costs this year, though Turkey followed suit on Thursday and other emerging-market nations are also expected to tighten monetary policy in coming months. The move contrasts with that of the U.S. Federal Reserve, which earlier on Wednesday projected near-zero interest rates to last at least through 2023.
What Bloomberg Economics Says
“The central bank’s part-hawkish, part-dovish message leaves some questions open. The bank’s apparent intention is signaling that the rate adjustment will be fast but moderate. But if fiscal risks persist beyond the next policy meeting, it may need to revisit its plans.”
-- Adriana Dupita, Latin America economist
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Fiscal concerns are on the rise in Brazil as congress backed a second yet smaller round of cash handouts to help the nation’s poor ride out the coronavirus crisis. With the virus death toll hitting records, authorities in populous states such as Minas Gerais and Sao Paulo are imposing the harshest restrictions yet on commerce. That may lead the Brazilian economy to contract again in the first quarter, after posting strong growth at the end of 2020.
In that context, bank board members wrote that they decided to start a process of “partial normalization” of monetary policy. In other words, their strategy is likely to deliver strong and fast interest rate hikes without completely removing the monetary stimulus, according to Roberto Secemski, a Brazil economist at Barclays Plc.
Policy makers acknowledged chances that the worsening of the pandemic may slow inflation. Still, consumer price forecasts have steadily risen, and are currently nearing the upper limit of the target range for this year.
Annual inflation spiked to a four-year high of 5.2% in February, above this year’s target of 3.75%, which includes a tolerance margin of plus or minus 1.5 percentage points. Brazil’s real has plunged roughly 7% so far in 2021, fanning consumer price increases by making imports more expensive.
“This was a bold move,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. “Brazil’s central bank saw no option value in a very gradual rate normalization strategy.”
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