Brazil May Raise Overnight Rate for First Time in 18 Months

Brazil’s central bank may raise interest rates for the first time in 18 months as the rapid recovery of Latin America’s biggest economy has pushed inflation above its 4.5 percent target.

Henrique Meirelles, who may be heading up his last meeting of the monetary policy committee as the central bank’s president, will raise the overnight rate by at least a quarter- point, according to 30 out of 57 economists surveyed by Bloomberg. Twenty-seven analysts expect the bank to pause at 8.75 percent for a fifth straight meeting.

Record low borrowing costs helped Brazil pull out of its deepest recession in a decade in 2009 and a revival of domestic demand may push the $1.6 trillion economy to its fastest growth in two decades this year, according to Paulo Leme, chief Latin America economist at Goldman Sachs Group Inc. At the same time, inflation has exceeded the bank’s target in 2010 and economists surveyed by the bank expect still higher prices by year-end.

“It’s clear rates have to be lifted, so there is no reason to wait until April,” Guilherme da Nobrega, an economist at Itau Unibanco Holding SA, said in phone interview from Sao Paulo. “The call for a rate hike this week gained strength after inflation jumped more than expected in the two first months of the year, rapidly impacting the outlook.”

Consumer price will rise 5.03 percent this year, compared to 4.83 percent in the 12 months through February, according to the median forecast in a weekly central bank survey of about 100 economists published March 15.

Consumer prices would jump more than 6.5 percent in 2011 if the central bank failed to act, Leme said.

‘Unpopular’ Steps

Meirelles, 64, who has served as head of the bank since President Luiz Inacio Lula da Silva took office in January 2003, faces an April 2 deadline to decide whether to resign his post to become eligible to run in October elections.

Speaking in Brasilia on Feb. 26, Meirelles said policy makers were ready to take “unpopular” steps to keep inflation in line with targets and that the political calendar wouldn’t affect monetary policy.

Zeina Latif, chief economist at ING Bank in Sao Paulo, pushed forward her call for the start of interest rate increases to March from April after Meirelles comments.

“The central bank will reinforce its reputation of autonomy should it raise rates this week,” Latif said. “It’s clear there is no need for this stimulus.”

Market View

With an increase at today’s meeting, real interest rates in Brazil, or the difference between the benchmark rate and annual inflation, will continue to be the third highest among 53 economies tracked by Bloomberg.

A rate increase today would make Brazil the second country in the Group of 20 nations to raise borrowing costs, following Australia.

The yield on the interest rate future contract maturing in January, the most actively traded contract on Sao Paulo’s BM&F exchange, has risen 31 basis points, or 0.31 percentage point, to a 10-month high of 10.52 percent since touching 10.21 percent on Feb. 8, the lowest price in 2010.

Traders are pricing in at least a quarter-point interest rate increase at today’s meeting, according to Bloomberg estimates based on interest rate futures contracts.

‘Vigorous Expansion’

The stimulus implemented by Lula’s administration last year “is no longer needed given that the economy is expanding,” Goldman Sachs’ Leme said. “The central bank needs and will act.”

Over the course of five meetings beginning in January 2009, policy makers cut the Selic rate to 8.75 percent from 13.75 percent and injected about 100 billion reais ($56.6 billion) into the country’s money markets.

Brazil’s economy started rebounding in the second quarter of 2009 and expanded 2 percent in the last quarter of 2009 from the previous three months, the fastest pace in two years.

Meirelles said the economy had entered a “vigorous expansion phase” after the national statistics agency reported March 11 that retail sales jumped by a record 2.7 percent in January from December, signaling stronger growth to come.

Elections, Signaling

Marcelo Carvalho, Morgan Stanley’s chief economist in Sao Paulo, said it would be “convenient” for the central bank to wait until the April meeting to start raising rates, after Meirelles decides upon his political future.

“Meirelles political future is a source of uncertainty and it would be good to get this out of the way, whatever his decision is, before the central bank moves,” he said.

Meirelles plans to resign March 31 to run for vice president alongside Dilma Rousseff, Lula’s Cabinet chief and his chosen successor, IstoE magazine reported March 10, without saying where it obtained the information.

Replacing Meirelles will be Alexandre Tombini, the director of financial regulation at the bank, the Sao Paulo-based magazine reported.

Carvalho said it is likely that the central bank keeps the rate at 8.75 percent today, with a divided vote to make it clear that a tightening cycle will start in April.

The central bank last raised rates on Sept. 10, 2008, days before Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in U.S. history.