Brazil central bank will soon turn more hawkish
At next week's policy meeting, the Brazilian central bank’s tone will likely be more hawkish but the bank will probably wait before hiking the interest rate
With inflation in Brazil dangerously close to the upper limit of the central banks target, the monetary policy committee (Copom) of the Brazilian central bank (BCB) will adopt a hawkish tone in the meeting scheduled to take place on March 5 and 6, analysts said.
David Beker, an economist with Bank of America Merrill Lynch, noted that after 525 basis points of cuts to the Selic rate since it started a monetary easing cycle in September 2011, the Brazilian central bank signaled in October last year that the rate will be maintained at the historical low level of 7.25% for a long period of time.
The decision to use a statement that indicated interest rates would remain on hold for a while limited the BCBs options ahead, Beker wrote in a market note.
This statement was used in the October, November and January Copom meetings, and was consistent with the idea that monetary policy was going to remain expansionary in order to help economic activity pick up by supporting the flattening of the local yield curve, he said.
But January inflation surprised on the upside, bringing yearly accumulated inflation at 6.15%, prompting BCB President Alexandre Tombini and Finance Minister Guido Mantega to speak out against price rises and say that they can be contained by the central bank if necessary.
So far it is clear than when the BCB eventually decides to change rates, the move will be a rate increase, but the timing of the move remains uncertain, said Beker.
INFLATION A MAJOR CONCERN
Neil Shearing, chief emerging markets economist at Capital Economics, also believes that rising inflation is now the major concern for policy makers in Brazil.
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But while interest rates look set to remain at their record low of 7.25% for the next couple of months, signs that inflation may not fall back in the second half of the year are likely to push the BCB towards tightening policy, he added.
Beker expects the central bank to hold rates at their record low in the meeting next week but to adopt more hawkish language in the statement.
Our base case for the statement is for the BCB to recognize further deterioration in the inflation backdrop, removing the idea that rates are going to remain low for a sufficiently long period, he said.
This would not indicate that the central bank would necessarily raise interest rates in April; but if the statement signals that Copom will carefully monitor the economic scenario until the next meeting, the odds for hikes in April would be higher, according to Beker.He noted that this wording was used in December 2010, when the BCB kept rates on hold before raising them in January 2011.
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