Brazil raises interest rates to 7.5%
sought to reassure markets on Wednesday night that it was still the nation’s principal guardian of inflation by ending a period of easier monetary policy that lasted nearly two years.
Brazil’s central bank sought to reassure markets on Wednesday night that it was still the nation’s principal guardian of inflation by ending a period of easier monetary policy that lasted nearly two years.
The central bank’s monetary policy committee increased the benchmark Selic interest rate by 25 basis points to 7.50 per cent, in response to a surge in inflation through the top of the government’s official target range last month.
“On the other hand, the committee considers that internal and, principally, external uncertainties surround the prospective scenario for inflation and recommends that monetary policy be administered with caution.”“The committee judged that the high level of inflation and the dispersion of price increases, among other factors, contributed to resilience in inflation and required a monetary policy response,” the central bank said in a note.
The move follows increasing debate in the market over whether price expectations were becoming unanchored in a country with a historic dread of inflation dating from earlier decades when it hit as much as 2,500 per cent.
The government has been pursuing a series of less orthodox measures to provide temporary relief to prices, such as suppressing petrol prices and cutting taxes on cars and other goods. But these are seen as inflationary in the long term.
Market economists have argued that with inflation breaking through the official target range of 4.5 per cent plus or minus 2 percentage points last month, the central bank needed to raise rates to show that the inflation-targeting role of monetary policy was still intact.
The 25-point basis point increase should satisfy pundits for now, with many in the market forecasting a gradual and more constrained tightening cycle than in the past.
Conflicting signals from government officials in recent weeks had confused the market, with 21 out of 58 analysts surveyed by Bloomberg expecting rates to remain unchanged, 19 expecting an increase of 25bp and 18 a 50bp hike.
A week ago, only eight out of 53 surveyed at that time had expected the central bank to act this week rather than at the next meeting in May.
Goldman Sachs economist Alberto Ramos said in a note that rather than launch the type of prolonged hiking cycle of 300 bps or so that would be necessary to bring inflation back to the midpoint of the target range, the central bank would opt for something more contained.
“We expect a short hiking cycle of no more than 100bp-150bp total?.?.?.?spread out over three to four [monetary policy committee] meetings,” he said.
Nonetheless, it had been important to get the cycle started on Wednesday to avoid having it run into next year`s presidential election, he said.
“We saw part of the rationale for initiating a moderate rate hiking cycle now (rather than in May or later) as driven by the desire not only to re-anchor inflation expectations and regain credibility but also to reduce significantly the probability that the central bank would be called to hike in 2014 ahead of the pivotal presidential election,” he said.
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