Meirelles Vows Vigorous Action to Keep Brazil From Overheating

Brazilian policy makers will take “vigorous action” against inflation to ensure that Latin America’s biggest economy doesn’t overheat, central bank President Henrique Meirelles said.

All 38 economists surveyed by Bloomberg expect policy makers meeting this week to raise the benchmark interest rate for the first time since September 2008 to slow inflation that’s exceeded their target since January.

The central bank has kept the overnight rate at a record low 8.75 percent since July to foster economic growth that may now quicken to the fastest pace in more than two decades. Inflation though mid-April accelerated to a 11-month high as an expansionary monetary stance spurred credit growth and domestic demand.

“In situations like this one, we need a program of vigorous action,” Meirelles, 64, said in an interview in Washington, on the sidelines of the International Monetary Fund’s spring meetings. Brazil’s economy “is heated and there’s a risk of overheating, but we certainly won’t allow that to happen given that the central bank is ready to take the necessary measures.”

Yields on Brazilian interest rate future contracts gained April 23 for the first time in three days after the IPC-S consumer price index rose 0.76 percent in the month ending April 22, exceeding economists’ forecasts.

The yield on the contract due January 2011 jumped four basis points, or 0.04 percentage point, to 10.73 percent. The yield on the contract has gained 0.33 percentage point this month as inflation expectations accelerated.

50 or 75 Points

Meirelles’ comments “signal that the central bank may increase rates by more than 50 basis points,” Zeina Latif, ING Bank NV’s chief economist in Sao Paulo, said in a phone interview.

The last time the central bank started increasing rates, in April 2008, it surprised 34 of 46 economists by opting for a bigger-than-expected increase.

The bank said at the time it was frontloading the rate increases in a bid to “reduce the scope” of the total adjustment. The bank went on to raise the overnight rate four times from 11.25 percent to 13.75 percent in September 2008.

Analysts are split over the size of the interest rate increase they see policy makers implementing at the end of their two-day meeting this week, the Bloomberg survey of economists shows. While 20 economists expect a half-point increase in the Selic to 9.25 percent, 17 expect an increase of three quarters of a percentage point and one sees a full-point increase.

Traders are pricing in a 65 basis-point increase on April 28, according to Bloomberg estimates based on interest rate futures. Given that the central bank raises rates in increments of 25 basis points, futures show that most traders expect a 75 basis-point increase this week.

‘Brazil’s Challenge’

Inflation quickened to 5.2 percent in the 12 months through mid-April, and will rise 5.32 percent by year-end, according to a central bank survey of about 100 analysts taken April 16. The same weekly survey showed analysts expect consumer price increases to exceed the government’s target of 4.5 percent in 2011 as well.

“Brazil’s challenge in the next 12 months is to keep inflation in line with targets,” Meirelles said.

After slipping into a recession in 2009, Brazil’s $1.6 trillion economy may expand this year at the fastest pace in more than two decades, according to Goldman Sachs Group Inc, which is forecasting a 6.4 percent expansion.

‘Imperative’

Meirelles, the former head of global banking at FleetBoston Corp., said the economy is recovering at the pace policy makers had expected and that the timeline laid out in December for phasing out anti-crisis stimulus measures remains adequate.

The central bank’s decision to leave the benchmark Selic rate unchanged last month surprised 30 of 57 analysts in a Bloomberg survey who were predicting a 50 basis-point increase.

Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo and a former central bank board member under Meirelles, said that he had “difficulties” understanding the decision, given that policy makers in their minutes said a “tightening cycle is an imperative.”

‘Falling Trend’

Meirelles, Brazil’s longest serving central bank president, said real interest rates after inflation will continue in a “downward trend” in the coming years.

“A formally independent central bank could speed up the pace” at which interest rates fall, Meirelles said. “Especially if it was done at the beginning of the next government.”

Meirelles said that real interest rates have dropped from about 14 percent to 6 percent since he was appointed in 2002.

Brazil, which defaulted on its foreign debt twice in the past 25 years, received its first investment grade rating from Standard & Poor’s in 2008. The real has more than doubled in relation to the U.S. dollar since President Luiz Inacio Lula da Silva took office in 2003 and stocks have gained more than 1,000 percent in dollar terms.