Tags: brazil | rate increase | markets | Rousseff

Brazil's Surprise Rate Rise Shows Rousseff Courting Markets

Thursday, 30 October 2014 10:08 AM

Brazil’s central bank increased interest rates sooner than investors and analysts forecast to buy policy makers credibility two days after President Dilma Rousseff’s re-election sparked a sell-off in assets.

Policy makers, led by central bank President Alexandre Tombini, voted 5-to-3 Wednesday to raise the benchmark Selic by a quarter-point to 11.25 percent, saying the move would reduce the cost of ensuring a better inflation outlook in 2015 and 2016. One of 54 economists surveyed by Bloomberg correctly forecast the increase while the remaining analysts expected the rate to be left unchanged for the fourth straight meeting.

“It’s a positive surprise that needs to be applauded,” Carlos Kawall, chief economist at Banco J. Safra SA, said by phone. “If we were to write a checklist of what we’d like to see to get the economy back on track, this measure would have been the first.”

Rousseff faces the challenge of reviving growth, slowing inflation and narrowing a budget deficit that threatens the country’s investment-grade status. Stocks in Sao Paulo were among the worst performing in the world this week as investors questioned whether she would adopt the measures needed to fix the economy.

A trained economist, the incumbent during the campaign pledged to do an “even better” job of controlling inflation in her second term while committing to replace Finance Minister Guido Mantega.

Fueled Prices

Mantega increased public spending, cut taxes and boosted subsidized credit to companies and consumers in a bid to revive economic growth, which on average was the slowest for a president in more than two decades. The policies widened the budget deficit and fueled consumer prices.

Inflation in the month through mid-October accelerated to 0.48 percent from 0.39 percent a month earlier, while the annual rate held at 6.62 percent. The central bank targets annual inflation of 4.5 percent, plus or minus two percentage points.

Brazil’s broadest measure of prices, the IGP-M index, rose 0.28 percent in October, more than forecast by all economists surveyed by Bloomberg, the Getulio Vargas Foundation, an education and research institution based in Rio de Janeiro, said on its website. The index, which is weighted 60 percent in wholesale prices, rose 2.96 percent in the past 12 months.

'Acting Quickly'

Raising the rate “sends a message that policy makers are acting quickly to address issues like fighting inflation,” said Michael Henderson, principal Latin America analyst at London-based Maplecroft who correctly forecast the decision. “Everything was on hold due to the elections, but they have to restore confidence that the central bank is independent enough to fulfill its role.”

The central bank board said in the statement accompanying Wednesday’s decision the balance of risks for inflation had become less favorable since the previous meeting on Sept. 2-3.

“The central bank is starting a tightening cycle that is welcome,” Roberto Padovani, chief economist at Votorantim Ctvm Ltda., said by telephone. “This is a good sign for the market.”

The real gained 1.58 percent as of 9:23 a.m. local time and has depreciated 2.4 percent this year. Swap rates on the contract due in January 2016 rose 35 basis points, or 0.35 percentage point, to 12.18 percent, while rates on the contracts due in January 2023 fell 14 basis points to 12.08 percent.

Five Years

Price increases have diminished consumer confidence, which in October fell to the lowest in more than five years, according to the Getulio Vargas Foundation.

The economy contracted 0.6 percent in the second quarter after shrinking a revised 0.2 percent during the first three months of the year. Investment dropped 5.3 percent on the quarter, while services and industry also shrank.

The central bank in September cut its 2014 gross domestic product growth forecast to 0.7 percent from June’s forecast of 1.6 percent. Analysts in the latest central bank survey expect growth of 0.27 percent.

“This could be a signal of a broader change in economic policy, but it’s too early to say for sure,” John Welch, macro strategist at Canadian Imperial Bank of Commerce, said by phone. “They needed to adjust, so it was good that they did it early.”

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Brazil's central bank increased interest rates sooner than investors and analysts forecast to buy policy makers credibility two days after President Dilma Rousseff's re-election sparked a sell-off in assets.
brazil, rate increase, markets, Rousseff
Thursday, 30 October 2014 10:08 AM
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