Brazil Readies First Rate Hike in Six Years: Decision Day Guide
(Bloomberg) -- Brazil is poised to raise its key interest rate from an all-time low as policy makers look past a shaky economic recovery to fight the fastest inflation in four years.
All but one of the 41 economists surveyed by Bloomberg expect the central bank to raise rates Wednesday, which it hasn’t done since 2015, making Brazil the first G-20 country to tighten monetary policy this year. Yet forecasts for how aggressive it will be vary widely.
Most analysts expect a half-point increase to the Selic rate, currently at 2%, though two see a quarter-point boost and one forecasts a 75 basis-point increase. Separately, some traders in the swap market as well as investors say an increase of as much as a full percentage point is warranted.
“The central bank needs to take timely action today or it risks losing control of inflation expectations,” said Pedro Dreux, partner and porfolio manager at Occam Brasil, adding that a 75 basis-point hike would be a “reasonable” move.
Food and fuel costs have surged in Latin America’s largest economy during the pandemic while the real weakened over 7% so far this year, reflecting growing investor unease about public finances just as the government prepares additional cash handouts to the poor. The quickly deteriorating inflation outlook is piling pressure on the bank led by Roberto Campos Neto to act fast to anchor price expectations and show independence from a recent interventionist shift by the administration of President Jair Bolsonaro.
Wednesday’s decision will be published on the central bank’s website at 6:30 p.m. local time in Brasilia, together with a statement from the bank’s board.
These are the most important points financial markets will be focusing on:
Investors will scan the statement for clues about the magnitude and length of the tightening cycle. In the minutes of its last policy meeting, the bank signaled borrowing costs were about to go up by saying it could no longer uphold its low-rate pledge as inflation expectations grew. Now, economists will look for direction on whether the Selic increases will be gradual or steep, and also on the most important factors policy makers will consider as they tighten.
What Bloomberg Economics Says
Just as important as the decision will be how the central bank describes its assessment of the economic conditions and how the rate move fits in its monetary policy strategy. Watch for any mention to this being “a relevant part of the adjustment” or “front-loading” -- especially if the bank raises rates by 75 or 100bps, as a part of the market expects.
--Adriana Dupita, Latin America economist
The bank’s latest inflation forecasts as well as the language it uses to describe price trends will be key for the market. For how long do policy makers expect consumer prices to keep rising above target? Some economists are betting on explicit warnings about the effects of emergency spending -- a phrasing that could signal more rate hikes are coming.
Economists surveyed by the central bank currently expect consumer prices to rise 4.6% in 2021, well above the 3.75% target for the year. Annual inflation last month accelerated to 5.20%, the fastest reading since January 2017.
Politics also represent a growing inflation threat, with Bolsonaro’s pressure for lower fuel prices and the return of former President Luiz Inacio Lula da Silva to the electoral game both adding to risk premium. While the central bank refrains from commenting on such developments, investors are aware they create pressure for higher borrowing costs to help shore up the currency. A weaker real fans inflationary pressure by making imports more expensive.
Since the last rate-setting meeting in January, the coronavirus crisis has dramatically worsened in Brazil. Record numbers of virus-related deaths and overflowing hospitals have forced local governments to impose the harshest lockdowns yet in the country, damping consumer confidence.
“We expect the monetary policy committee to acknowledge rising near-term downside risks to activity given the very intense second wave of Covid infections and related tightening of social distancing protocols and activity restrictions in a number of states,” Alberto Ramos, Chief Latin America economist at Goldman Sachs Group Inc., wrote in a research note.
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