Brazil’s central bank kept its benchmark interest rate unchanged at 10.75 percent after inflation slowed below target and as the global economic recovery falters.
The policy board’s pause, after three straight increases, matched the forecast of 46 of 57 economists surveyed by Bloomberg. Seven economists predicted a quarter-point increase, and four anticipated a half-point rise, betting that higher borrowing costs will be needed to prevent a rebound in inflation next year.
Today’s decision, made at the last policy meeting before October’s presidential election, could be the start of a six- month pause in interest rates, said Silvio Campos Neto, chief economist at Banco Schahin SA.
“The committee is waiting for new signs, because uncertainty is very high,” Campos Neto said from Sao Paulo.
Lower-than-forecast inflation in August and a “bearish” outlook for third-quarter growth mean the bank is taking a wait- and-see approach before raising rates any further, said Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto, a unit of Canada’s biggest bank.
“They could very well start hiking again next year if domestic demand and wage growth remain as hot as they are,” Chamie said in an interview.
Inflation Outlook
After growing at its fastest pace in 15 years in the first quarter, Latin America’s biggest economy has cooled, bringing consumer prices in August below the midpoint of the government’s target of 4.5 percent plus or minus two percentage points for the first time since January.
The bank’s board “does not expect the inflation levels registered in recent months to remain in the near future,” according to a statement accompanying the decision. Still, it said, “The process of reduction of risks in the inflationary scenario since its second-to-last meeting is continuing.”
The difference between yields on the overnight interest rate futures contract due in January 2011 and 2013 suggest that some traders are speculating that the bank will need to resume rate increases in the months ahead.
The spread between the contracts’ yields rose to 88 basis points today, or 0.88 percentage point, up from 53 basis points on Aug. 24. The real strengthened 0.6 percent to 1.7456 per dollar.
Central bank President Henrique Meirelles said Aug. 18 that growth will heat up again in the third quarter.
Bank Signals
“There will be a recovery -- the question is to what level of activity and inflation,” Meirelles said in an interview with GloboNews TV network. “The central bank cannot signal what it doesn’t know.”
Brazil’s $1.57 trillion economy may have expanded 0.5 percent to 1 percent in the second quarter, Finance Minister Guido Mantega said this week. Growth will accelerate to an annual rate of 6.5 percent to 7 percent by year-end, he added.
Analysts predict the economy expanded 0.8 percent in the second quarter from the first quarter, according to the median estimate in a Bloomberg survey of 40 analysts. The country’s statistics agency releases the data on Sept. 3.
Brazil’s central bank has expressed concern about the outlook for the global economy, and data from the U.S. seem to indicate a prolonged period of low growth, said Virgilio Castro Cunha, head of fixed income strategy at Bank of America Corp. in Sao Paulo.
World Rates
“We’re living in a new world that will work with low real interest rates for a long time, making it more comfortable for investors in Brazil,” Cunha said.
Brazil’s consumer prices unexpectedly fell in the month through mid-August, pushing the annual inflation rate to 4.44 percent, down from 5.22 percent in mid-April.
Even as 2010 inflation expectations fall, forecasts for 2011 have increased to 4.87 percent, from 4.8 percent four weeks ago, according to a central bank survey of about 100 economists published this week.
There is a political risk premium on bonds maturing after 2010, due to uncertainty among traders about whether a government led by Dilma Rousseff might tolerate higher levels of inflation, said Roberto Padovani, chief economist at Banco WestLB do Brasil SA.
Dilma Rousseff, former Cabinet chief and President Luiz Inacio Lula da Silva’s chosen successor, has a 24 percentage point lead over opposition candidate Jose Serra, according to an Ibope poll published Aug. 28.
Rousseff, on the campaign trail, said she wouldn’t reduce the government’s inflation target if elected. In an interview this week with TV Globo, she said it was a “crime” to defend spending cuts.
Meirelles, who has served as the bank’s president since 2003, has vowed to step down when a new government takes office Jan. 1.
“She’s not that hawkish in terms of fiscal or monetary policy,” Padovani said, speaking by telephone from Sao Paulo.
To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net. Iuri Dantas in Brasilia at idantas@bloomberg.net
The policy board’s pause, after three straight increases, matched the forecast of 46 of 57 economists surveyed by Bloomberg. Seven economists predicted a quarter-point increase, and four anticipated a half-point rise, betting that higher borrowing costs will be needed to prevent a rebound in inflation next year.
Today’s decision, made at the last policy meeting before October’s presidential election, could be the start of a six- month pause in interest rates, said Silvio Campos Neto, chief economist at Banco Schahin SA.
“The committee is waiting for new signs, because uncertainty is very high,” Campos Neto said from Sao Paulo.
Lower-than-forecast inflation in August and a “bearish” outlook for third-quarter growth mean the bank is taking a wait- and-see approach before raising rates any further, said Nick Chamie, global head of emerging-markets research at RBC Capital Markets in Toronto, a unit of Canada’s biggest bank.
“They could very well start hiking again next year if domestic demand and wage growth remain as hot as they are,” Chamie said in an interview.
Inflation Outlook
After growing at its fastest pace in 15 years in the first quarter, Latin America’s biggest economy has cooled, bringing consumer prices in August below the midpoint of the government’s target of 4.5 percent plus or minus two percentage points for the first time since January.
The bank’s board “does not expect the inflation levels registered in recent months to remain in the near future,” according to a statement accompanying the decision. Still, it said, “The process of reduction of risks in the inflationary scenario since its second-to-last meeting is continuing.”
The difference between yields on the overnight interest rate futures contract due in January 2011 and 2013 suggest that some traders are speculating that the bank will need to resume rate increases in the months ahead.
The spread between the contracts’ yields rose to 88 basis points today, or 0.88 percentage point, up from 53 basis points on Aug. 24. The real strengthened 0.6 percent to 1.7456 per dollar.
Central bank President Henrique Meirelles said Aug. 18 that growth will heat up again in the third quarter.
Bank Signals
“There will be a recovery -- the question is to what level of activity and inflation,” Meirelles said in an interview with GloboNews TV network. “The central bank cannot signal what it doesn’t know.”
Brazil’s $1.57 trillion economy may have expanded 0.5 percent to 1 percent in the second quarter, Finance Minister Guido Mantega said this week. Growth will accelerate to an annual rate of 6.5 percent to 7 percent by year-end, he added.
Analysts predict the economy expanded 0.8 percent in the second quarter from the first quarter, according to the median estimate in a Bloomberg survey of 40 analysts. The country’s statistics agency releases the data on Sept. 3.
Brazil’s central bank has expressed concern about the outlook for the global economy, and data from the U.S. seem to indicate a prolonged period of low growth, said Virgilio Castro Cunha, head of fixed income strategy at Bank of America Corp. in Sao Paulo.
World Rates
“We’re living in a new world that will work with low real interest rates for a long time, making it more comfortable for investors in Brazil,” Cunha said.
Brazil’s consumer prices unexpectedly fell in the month through mid-August, pushing the annual inflation rate to 4.44 percent, down from 5.22 percent in mid-April.
Even as 2010 inflation expectations fall, forecasts for 2011 have increased to 4.87 percent, from 4.8 percent four weeks ago, according to a central bank survey of about 100 economists published this week.
There is a political risk premium on bonds maturing after 2010, due to uncertainty among traders about whether a government led by Dilma Rousseff might tolerate higher levels of inflation, said Roberto Padovani, chief economist at Banco WestLB do Brasil SA.
Dilma Rousseff, former Cabinet chief and President Luiz Inacio Lula da Silva’s chosen successor, has a 24 percentage point lead over opposition candidate Jose Serra, according to an Ibope poll published Aug. 28.
Rousseff, on the campaign trail, said she wouldn’t reduce the government’s inflation target if elected. In an interview this week with TV Globo, she said it was a “crime” to defend spending cuts.
Meirelles, who has served as the bank’s president since 2003, has vowed to step down when a new government takes office Jan. 1.
“She’s not that hawkish in terms of fiscal or monetary policy,” Padovani said, speaking by telephone from Sao Paulo.
To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net. Iuri Dantas in Brasilia at idantas@bloomberg.net
