Brazil Signals World’s Biggest Key Rate Increase Far From Over Brazil’s central bank raised the benchmark interest rate a third consecutive time and said it was giving continuity to the world’s biggest tightening cycle, signaling increases may be extended through year-end as policy makers battle inflation. The bank’s board, led by President Alexandre Tombini, yesterday raised the benchmark Selic (BZSTSETA) rate by 50 basis points to 8.50 percent, as forecast by all 51 analysts surveyed by Bloomberg. The move led Itau Unibanco to reiterate its call for a rate increase in each of the three meetings left this year. Brazil, Egypt and Indonesia are the only three major economies tracked by Bloomberg that are raising interest rates as emerging markets take steps to stem capital outflows sparked by concern the U.S. Federal Reserve will start to scale back liquidity injections. In Brazil, quickening inflation is sapping economic growth and further driving away investors. “Emerging markets will now have to compete for capital with the U.S.,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “Countries that carried out the necessary adjustments will suffer less. Brazil is likely to suffer more.” New leaders in China reined in credit growth as President Xi Jinping signaled last month he will tolerate slower growth amid signs banks have overextended their finances by lending to property companies and local governments. Tighten Rules In India, a plunge in the rupee prompted the nation’s market regulator to tighten rules on futures and options transactions this week, while the central bank barred banks from proprietary trading of such contracts. The Reserve Bank of India also held interest rates last month for the first time in four reviews, citing inflation risks. Brazil is one of only three countries among 50 major economies tracked by Bloomberg that is raising borrowing costs this year as above-target inflation undercuts months of government stimulus by curbing retail sales growth. After a quarter-point rate increase in April, policy makers in Brazil doubled the pace in May and reiterated warnings that the outlook for inflation remains unfavorable. Consumer prices rose 6.70 percent in June from last year, the fastest pace since October 2011, the national statistics agency said July 5. The central bank targets inflation at 4.5 percent, plus or minus two percentage points. Yesterday’s move to continue with a 50 basis-point increase “will contribute to put inflation on a decline and assure that this trend will persist next year,” policy makers said in a statement accompanying the decision. Raise Rates The central bank board known as Copom will raise rates by 50 basis points in their next two meetings before finishing the year with a quarter-point increase, Itau economists Ilan Goldfajn and Caio Megale wrote in a note e-mailed to investors yesterday. “By maintaining the pace of rate hikes and the statement, the Copom suggests comfort in its plan to fight inflation,” they wrote. Swap rates on the contract maturing in August, the most traded in Sao Paulo yesterday, climbed six basis points to 8.23 percent. A dimming outlook for emerging markets prompted the International Monetary Fund this week to cut its global growth forecast for 2013 to a “subdued” pace of 3.1 percent. The Washington-based lender reduced its estimate for emerging economies to 5 percent from 5.3 percent from April while dropping the outlook for Brazil to 2.5 percent from 3.4 percent. Unexpectedly Slowed Since May 29, when Brazil’s government reported that growth of gross domestic product unexpectedly slowed to 0.55 percent in the first quarter, a number of key economic indicators have missed expectations. Retail sales, which helped propel Brazil’s economic expansion in recent years, grew less than half the pace of analysts’ estimates in April and will contract in May for the second time in 2013, according to the median estimate from 27 economists surveyed by Bloomberg. The statistics agency reports on sales today. Lojas Renner SA (LREN3), Brazil’s biggest clothing retailer, is one of the companies that has seen its business outlook deteriorate on inflation concerns. The company’s share price on June 28 declined to the lowest level since August after JPMorgan Chase & Co. cut its recommendation on the stock due to declining disposable income and deteriorating consumer sentiment. Industrial output declined 2 percent in May, lower than all 29 forecasts of analysts surveyed by Bloomberg. The same week, analysts cut their economic growth forecasts for Brazil for this year and next to below 3 percent for the first time, according to the July 5 central bank survey. ‘Weak’ Activity “Economic activity is weak, and that’s a sign that inflation continues to be high,” Darwin Dib, chief economist at CM Capital Markets Asset Management, said by phone from Sao Paulo before yesterday’s decision. Brazil’s Ibovespa has declined 33 percent in dollar terms in 2013, the worst performance among 94 global benchmark indexes after the Lima General Index. The Hang Seng China Enterprises Index has dropped 18 percent. The real fell 0.2 percent to 2.2645 per dollar yesterday and has weakened 12.8 percent in the past three months, the biggest drop among the 16 most-traded currencies tracked by Bloomberg. The rout comes as investors withdrew $13.9 billion from equity mutual funds invested this year in BRICs nations that also include Russia, India and China, according to EPFR Global. The MSCI BRIC Index fell 12 percent last quarter while the nations’ currencies sank 4.1 percent against the dollar and government bonds lost an average 0.6 percent, the only such correlation in data compiled by Bloomberg going back seven years. Depreciation The real’s depreciation pushes up the price of some imports and threatens to further fuel inflation that helped spark nationwide demonstrations last month. Protesters took to the streets in early June to oppose a bus fare increase in Sao Paulo. Discontent later spread to other metropolitan centers including Brasilia, Porto Alegre and Rio de Janeiro, as demonstrators expanded their grievances to include corruption and public services. Citing a need to rein in federal spending, Finance Minister Guido Mantega on June 27 decided to gradually unwind tax cuts on home appliances. Days later, President Dilma Rousseff said that fiscal control helps contain inflation. The central bank board will contribute by tightening monetary conditions in future meetings, John Welch, macro strategist at Canadian Imperial Bank of Commerce, said. Welch, like Itau, expects two more half-point increases followed by a quarter-point raise. “The central bank is going to tighten more,” he said by phone from Toronto after yesterday’s decision. “They have to tighten more and they have to do it quickly if they want to control inflation”
Posted on: Thu, 11 Jul 2013 10:23:38 +0000
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