Brazil’s central bank said today the inflation outlook improved and that domestic demand is easing, reinforcing bets policy makers may keep interest rates unchanged in August after increases at every meeting this year.
Policy makers raised the benchmark interest rate to 12.50 percent this month, the fifth straight increase, in a bid to slow price increases running at a six-year high. Inflation, which breached the upper limit of the government’s target in April and will continue to accelerate in the third quarter, will start slowing toward target in the final three months of the year, policy makers said in the minutes of their July 19-20 meeting.
The Monetary Policy Committee “understands that the prospective outlook for inflation, since the last meeting, shows more favorable signs,” the central bank said in the minutes published on its website today.
While traders increased bets today that policy makers won’t raise interest rates in August, economists continue to forecast the government will fail to bring inflation back to the mid- point of its target next year, according to a central bank survey.
“The minutes reinforce my bets that the central bank won’t raise rates in August,” Ures Folchini, head of fixed income at Banco WestLB do Brasil SA, said in a phone interview from Sao Paulo. “Small changes in the text signal that the central bank’s biggest concerns about inflation have been dissipated.”
Interest Rate Futures
Yields on interest rate futures contracts maturing from October 2011 to April 2013 were either unchanged or fell today. The yield on the January 2013 contract dropped one basis point to 12.67 percent at 11:26 a.m. New York time.
Economists, who expect the central bank to raise the overnight rate by a quarter-point to 12.75 percent next month, forecast consumer prices will rise 6.31 percent this year and 5.28 percent in 2012, according to the median estimate in a central bank survey published July 25. Annual inflation, which quickened in the past 10 months, accelerated to 6.71 percent in June.
The government targets inflation of 4.5 percent and has a plus or minus 2 percentage point leeway. The central bank said it seeks to bring inflation back to 4.5 percent in 2012.
According to both the bank’s reference and market scenarios outlined in the minutes of the July meeting, inflation won’t slow to “around” the 4.5 percent target until the first half of 2013. Prices will remain above the target this year and next, the central bank forecast shows. “High and growing uncertainties” in the global economy make it harder to identify the persistence of recent price pressures, the minutes says.
‘Supply Shocks’
The central bank said the effects of “supply shocks” from the end of last year and beginning of 2011 have already affected consumer prices. That signals the “worst” patch for inflation is over, said Folchini. The bank also said the global economic outlook deteriorated and that prices of key commodities dropped, reinforcing the view that they plan to keep rates unchanged, he said.
As in the statement accompanying the bank’s decision, policy makers removed from the minutes language committing themselves to raising rates for a “sufficiently long period.”
“The most important aspect was that the central bank removed a comment indicating a gradual approach,” said Leonardo Sapienza, chief economist for Banco Votorantim SA in Sao Paulo. Sapienza said that the bank left the door open for another rate increase in August. “They see the same risks that they saw before,” he said.
Borrowing Costs
President Dilma Rousseff’s administration is relying on a mix of higher borrowing costs, spending cuts and measures to slow credit growth to tame inflation. At the same time, it has been adopting measures to try and weaken its currency that reached a 12-year high this week.
Chief strategist at CM Capital Markets Luciano Rostagno expects policy makers to increase rates again by a quarter point in August before pausing.
“The central bank indicates more that the cycle is near the end than that it ended in July,” Rostagno said.