Brazil Banks Push Up Rate-Increase Forecasts on GDP Recovery

Brazil’s biggest banks are moving up forecasts for interest-rate increases to as soon as next month as concern mounts that an economic recovery will fuel inflation.

Banco Santander SA’s local unit, which is Brazil’s third- biggest private bank, pushed forward last week its call for the central bank’s first increase of the benchmark 8.75 percent rate to March 17 from April 28. Sao Paulo-based Itau Unibanco Holding SA, the country’s largest private bank, said last week that the anti-inflation tone in the central bank’s latest policy meeting minutes “tilt the odds in favor” of an increase in March.

“It’s better to raise rates earlier, while inflation forecasts are still under control, rather than later,” Alexandre Schwartsman, Santander’s chief Brazil economist and a former central bank board member, said in a telephone interview from Sao Paulo. He predicts a 0.5 percentage-point increase, the first since September 2008, to 9.25 percent.

Brazil is poised to be Latin America’s first major country to raise borrowing costs after leading the region out of the global recession last year, according to Bloomberg surveys of economists. Pacific Investment Management Co., manager of the world’s biggest bond fund, prefers Brazilian debt over that from “much of the G-7” countries in part because of the central bank’s “hawkish” inflation stance, Michael Gomez, a co-head of emerging markets at Pimco, said in a Feb. 4 interview in Moscow.

‘Guardian’

“When policy makers say they will act preventatively, traders see the central bank as a guardian that won’t allow inflation to quicken,” said Ures Folchini, Banco WestLB do Brasil’s vice president for local markets in Sao Paulo. That may lead investors to drive down yields on long-term interest-rate futures, he said.

Brazilian local debt has returned 9.4 percent over the past 12 months, outperforming the 5.3 percent gain on emerging-market domestic bonds, according to JPMorgan Chase & Co. indexes. Bonds in Merrill Lynch & Co.’s Global Sovereign Broad Market Plus Index, which include Group of Seven countries, returned 3.4 percent over that time.

Interest-rate futures show traders expect policy makers led by bank President Henrique Meirelles to lift the benchmark rate at their March 18 meeting and to bring it to about 12.2 percent by year-end, according to data compiled by Bloomberg.

The yield on the government’s zero-coupon bond due in 2011 dropped to 11.04 percent from 11.43 percent at the end of last year, according to data compiled by Bloomberg. The yield was 10.7 percent six months ago.

BNP Paribas

Alexandre Lintz, chief strategist at BNP Paribas in Sao Paulo, said economists and traders are overestimating how quick policy makers will raise rates because the global recovery is poised to slow, which will cool Brazil’s expansion by damping demand for its exports.

“If all remained as it is today, interest rates could rise by April but the world will be in worse shape by then,” Lintz said in a phone interview.

Banco Central do Brasil, which has held the benchmark rate at a record low of 8.75 percent since July, said last week in minutes from its Jan. 26-27 policy meeting that a rebound in domestic demand could stoke inflation and that it’s ready to “promptly” adjust policy if needed.

Annual inflation jumped to 4.59 percent in January, putting it above the central bank’s 4.5 percent target for the first time since June, a government report showed Feb. 5. The central bank forecasts Latin America’s biggest economy will grow 5.8 percent in 2010, the second-fastest pace in 22 years, after expanding 0.2 percent in 2009.

October Elections

Economists predict gross domestic product will expand 5.35 percent this year, according to the median forecast in a central bank survey of about 100 financial institutions taken Jan. 29. That estimate is up from 4.2 percent in a Sept. 18 survey.

Economists’ year-end median forecast for the benchmark overnight rate climbed to 11.25 percent in the central bank’s Jan. 29 survey from 9.5 percent in late September. The next poll is scheduled to be released today.

Carlos Eduardo de Freitas, a former central bank board member, said policy makers will likely look to get the bulk of rate increases done before presidential elections in October.

“It’s better to start raising rates in March than to wait until October, an election month, when inflation will be running close to 6 percent,” de Freitas said in a telephone interview.