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Brazil Bank Keeps Rate, Signals No Increase Imminent

October 23rd, 2009
Brazil’s central bank

Brazil’s central bank

Brazil’s central bank kept its key interest rate at a record low last night and said its level was “consistent” with a non-inflationary recovery, signaling that no increase in borrowing costs is imminent.

The bank, in a statement accompanying the board’s unanimous decision to keep the benchmark rate at 8.75 percent, repeated word-for-word the communique issued Sept. 2 when it paused after five straight cuts this year.

The language shows bank President Henrique Meirelles believes he can keep borrowing costs low even as growth accelerates, said Alvise Marino, an emerging market economist for IDEAglobal. Annual inflation slowed for the seventh straight month in September.

“In contrast to growth forecasts, inflation expectations are very, very benign,” Marino said in an interview.

Traders are betting policy makers will have to raise rates next year as the labor market improves and consumer spending accelerates. The central bank will increase the so-called Selic rate to 8.9 percent by January, according to estimates based on overnight interest rate-futures contracts.

Yields on the interest rate future contracts fell across board this morning, signaling investors are tempering expectations the bank board will raise rates early next year.

At 10:26 a.m. New York time, the yield on a contract for January 2011 delivery fell four basis points to 10.33 percent. It has risen 10 basis points this month. A basis point equals 0.01 percentage point.

“This level of the benchmark interest rate is consistent with a benign inflationary outlook, helping ensure the conversion of inflation toward the target,” policy makers said in their statement.

Andre Loes, chief economist at HSBC Bank in Sao Paulo, said policy makers signaled yesterday that they will pause for a “long time.” With inflation under control, at 4.34 percent on an annual basis in September, the bank won’t need to raise rates before the fourth quarter of 2010, he said in an interview.

Rate Pressure

Lower inflation has eased pressure on Meirelles to consider an unpopular rate increase before deciding whether to step down in March and seek elected office, said Neil Shearing, an emerging market analyst for Capital Economics Ltd. in London. Meirelles, credited with taming double-digit inflation after almost seven years on the job, is facing calls from Finance Minister Guido Mantega to leave rates unchanged next year.

Analysts covering Latin America’s biggest economy expect gross domestic product will expand 4.8 percent next year, according to an Oct. 16 central bank survey. In July, they were forecasting 3.5 percent. Last week, the government said employers created enough jobs in the first nine months of the year to erase the almost 800,000 crisis-related layoffs.

Rising employment and stronger domestic demand have led the International Monetary Fund and analysts including Itau Unibanco Holding SA to raise their economic growth forecasts in recent weeks.

Brazil’s unemployment rate in six major metropolitan areas dropped to 7.7 percent in September, its lowest level this year, from 8.1 percent the previous month, the national statistics agency reported today. That exceeded the expectations for September of 26 of 27 analysts surveyed by Bloomberg, whose median estimate was 8 percent.

Undeniable Improvement

“There’s been an undeniable improvement in the growth outlook,” Shearing said this week after increasing his forecast for expansion next year to 5 percent from a previous forecast of 3 percent. That matches Mantega’s estimate.

How fast the central bank unwinds the monetary stimulus will depend on how potential threats affect the recovery, Shearing said. Most important, he said, is whether the global rebound that has pushed up prices for Brazil’s commodity exports and led to a return of capital inflows will peter out in 2010.

“The pace of economic recovery is still unclear, therefore it is too early to think about raising interest rates,” Elson Teles, chief economist at Sao Paulo-based Corretora Concordia, said in an interview from Rio de Janeiro before the rate decision.

Teles, who helps manage 4.2 billion reais ($2.4 billion) at Concordia, says the central bank can wait until the third quarter of 2010 before raising rates.

Accelerating Growth

Brazil emerged from its first recession since 2003 in the second quarter as GDP expanded a faster-than-forecast 1.9 percent in the April-June period from the previous quarter.

As growth accelerates, investors are betting the central bank will have to raise rates sooner even as inflation is forecast to remain below the government’s 4.5 percent target until at least 2011, according to the Oct. 16 central bank survey.

Yesterday’s meeting was the first since Meirelles last month joined the Brazilian Democratic Movement Party in his home state of Goias. He will preside over one more meeting this year.

Shearing said the increasing likelihood that Meirelles will step down before April to run for elected office shouldn’t have any immediate impact on monetary policy. The bigger issue, he says, is who President Luiz Inacio Lula da Silva names as his replacement.

Morgan Stanley said Oct. 19 that with fiscal policy likely to remain expansionary during the election cycle, rate increases could begin “sooner rather than later.”

Reporter: Joshua Goodman; Andre Soliani

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