Brazil’s central bank raised borrowing costs to the highest level in almost six years on price pressure from a weakening currency and kept its options open on the size of the next increase.
The board, led by board President Alexandre Tombini, voted unanimously on Wednesday to maintain the pace of tightening with a half-point increase to 12.75 percent, as expected by 59 of 63 economists surveyed by Bloomberg. Four analysts forecast a rate of 12.5 percent.
Policymakers took into consideration “the macroeconomic scenario and the inflation outlook,” according to a statement, which was virtually unchanged from the prior meeting.
“They had no choice but to continue tightening at that pace with such a huge correction in prices,” Canadian Imperial Bank of Commerce strategist John Welch said by telephone after the decision.
“They may cut the pace to 25 basis points, but that doesn’t mean they’re done,” he added.
Brazilian President Dilma Rousseff’s new economic team, spearheaded by Brazilian Minister of Finance Joaquim Levy, is unwinding tax breaks and allowing government-regulated prices to rise in an effort to shrink last year’s record budget deficit. The policies, coupled with a real that weakened to a 10-year low on Wednesday, are fanning inflation and threaten to damp an economic recovery.
Annual inflation accelerated to 7.36 percent in the middle of last month as prices surged 1.33 percent in the month. Policymakers have responded to the cost of living increase by lifting the key rate 0.5 percentage point at three straight meetings, giving Brazil the highest inflation-adjusted borrowing costs among G20 nations.
While keeping the text of Wednesday’s statement unchanged suggests continuity of monetary policy, the central bank is keeping its options open on the pace of tightening, consulting firm Rosenberg Consultores Associados head economist Thais Zara said by telephone.
The central bank might provide the market with more guidance in its inflation report on March 31, when there could be more clarity on the trend of the currency and progress of the government’s budget cuts, she said.
Since the bank’s prior meeting in January, the real has declined 12.7 percent to extend its six-month slide against the US dollar to 25 percent, the worst performance among the world’s 16 most-traded currencies.
The currency fell 1.6 percent on Wednesday to 2.9798 per US dollar from 2.9316 on Tuesday, its weakest level since 2004.
Zara said she did not expect the decision to move stock markets in yesterday’s trading.
“It already was counting on this decision,” she said, adding that investors will be looking for news on whether the Brazilian Congress accepts the Rousseff administration’s fiscal policies.
Levy and Tombini on Feb. 23 and Feb. 24 urged lawmakers to drum up support for the government’s austerity measures, including reductions in some pension and unemployment benefits that would save 18 billion reais (US$6 billion) a year. The minister, who took office in January, has already capped federal spending on some items and raised taxes on fuel, imports, credit and cosmetics.
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