Brazil Central Bank Doubles Pace of Interest Rate Hikes With Half-Point Rise

Posted by Admin November 6, 2024 Bussiness

(Bloomberg) — Brazil’s central bank raised its key interest rate by half a percentage point, doubling the pace of tightening and spelling out more explicitly the need for spending cuts to help tame above-target inflation.

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Board members unanimously decided to lift the benchmark Selic to 11.25% on Wednesday, as expected by all economists in a Bloomberg survey. It’s the second hike in a cycle that started in September with a quarter-point boost.

In an accompanying statement, policymakers wrote the risks to their inflation scenarios are tilted to the upside, citing factors including resilient economic activity, labor market pressures and rising consumer price forecasts. Perceptions of a worsening of Brazil’s fiscal outlook have hurt asset prices and expectations, especially risk premium and the exchange rate, they wrote.

“The Committee stresses that a credible fiscal policy committed to debt sustainability, with the presentation and execution of structural measures for the fiscal budget, will contribute to the anchoring of inflation expectations and to the reduction in the risk premia of financial assets, therefore impacting monetary policy,” they wrote.

Central bankers led by Roberto Campos Neto opted to accelerate rate hikes as the government’s expansive fiscal policy and a resilient economy help send their own inflation forecasts higher. In addition, a severe drought has driven up food and energy costs, while doubts about President Luiz Inacio Lula da Silva’s commitment to spending cuts have dragged down the real. Many analysts lifted their Selic forecasts immediately following Wednesday’s announcement.

What Bloomberg Economics Says

“Policymakers accelerated the tightening pace, tilted slightly more hawkish and refrained from providing forward guidance. That silence may give the BCB some flexibility, but could also fuel bets on a 75-basis-point hike in December. The central bank could find it hard to counter that and establish hawkish credentials ahead of a shift in the board.”

— Adriana Dupita, Brazil and Argentina economist

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Since taking office in 2023, Lula’s policies have included expanded transfers to the poor and minimum wage hikes. Now his ministers are debating some cuts to outlays in an attempt to rebuild investors’ trust in the sustainability of public accounts. Discussions are centered on how to limit programs whose funding needs are rising above the limit established in Brazil’s fiscal rules.

Finance Minister Fernando Haddad told reporters later on Wednesday the government may be close to a final agreement on the spending reductions.

Campos Neto has said the government needs a “positive fiscal shock” to rein in not only inflation but also investors’ expectations for large rate hikes, which he has described as “exaggerated.” Traders have priced in the Selic surpassing 13% next year.

Inflation Forecasts

In their statement, central bankers wrote that both headline inflation and underlying price measures are running above the 3% target. Their forecasts show cost-of-living rises at 4.6% at the end of 2024 — above the 4.5% upper limit of the tolerance range — and only easing to 3.6% in the second quarter of 2026.

“This was a hawkish statement, without guidance and with upward revisions to their inflation projections,” Mirella Hirakawa, research coordinator at Buysidebrazil, wrote in a report. She now sees the end-of-cycle key rate at 13% in May of next year, up from her previous estimate of 12.5% in March.

The tumble in the real — which weakened over 14% so far this year — is further complicating the bank’s job of taming prices, making imports more expensive. The currency fell as much as 2% on Wednesday, though later reversed to gains amid global market volatility following Donald Trump’s election win in the US.

Brazil’s annual inflation sped up to 4.47% in early October, according to the national statistics institute. Analysts surveyed by the monetary authority see consumer price increases at 4.59% in December.

While policymakers refrained from providing detailed guidance, they reaffirmed that future rate hikes and the size of the tightening cycle will be determined by their “firm commitment of reaching the inflation target,” their statement said.

“They still sound very worried on inflation and how fiscal policy can impact inflation,” said Brendan McKenna, an emerging-market economist and strategist at Wells Fargo. “I see this as very much open to anything. Another 50, at least for now, is the most likely move next meeting, but a 75 is still an option,” he said on expectations for coming rate hikes.

–With assistance from Giovanna Serafim.

(Re-casts story, adds more details from central bank statement starting in third paragraph, economist comments starting in sixth)