Brazil’s interest rates are going higher and here’s why: 8.13% inflation.
The April meeting minutes from the Central Bank of Brazil’s monetary policy committee’s recent 50 bps hike came out on Thursday and it is more hawkish than the market hoped.
Fixed income investors were hoping that a deteriorating labor market and week industrial production figures from April would result in a more dovish tone at the BCB. Not with inflation at 8%. That’s the old central bank.
This is the new, old central bank. It’s going back to the unsexy, but reliable days of inflation targeting. When Henrique Meirelles was Brazil’s central banker under president Luiz Inacio Lula da Silva, the market loved him.
And I suspect the market will get used to high interest rates in Brazil this year so long as inflation comes to target. Central bank governor Alexandre Tombini is gunning for 5.5% next year. He has a long way to go.
Barclays Capital said today that after reading the meeting minutes, they now expect the benchmark Selic rate to go up another 25 basis points to 13.5%.
“The minutes seem to show a board that continues to have concerns regarding the inflation trajectory, downplays the deterioration of the activity data observed thus far and emphasizes that the monetary policy actions deployed hitherto are still not enough to guarantee the convergence of inflation to the mid-point of the target by the end of 2016,” BarCap analyst Bruno Rovai wrote in New York today.
The central bank increased the regulated energy and gas price outlook for this year, to 11.8% higher from 10.7%. That means year ending inflation has gone to 8.25% from 7.47%, while 2016 is inching above target now.
The central bank is also reducing its expectations for the primary surplus for this year. It’s gone from a percentage target of 1.2% of GDP to a nominal estimate of 66 billion reals, or roughly $22 billion. In percentage terms, that comes out to about 1% of GDP based on Barclays’ estimates.The bank’s inflation forecasts continue to show 2016 missing the target.
Investors, therefore, should assume 14% interest rates are only a matter of time. This is good news for bond buyers, perhaps, who can get amazing yield in the local currency, but not so good for Brazilian companies looking for financing.
While the central bank is not forecasting a 14% interest rate anytime soon, the floor is 12.75% currently, up from 12.25%. The meeting minutes also showed that the bank was mindful of weaker labor markets. If this worsens in the months ahead, then we will see the central bank pause in its hiking cycle unless inflation starts going over 8.25%.
The central bank now sees inflation as its mandate, and the job market and business investment climate will have to depend on state and local factors.The bank’s monetary policy committee repeated the message that it aims to anchor 2016 inflation, making a June hike very likely. Rovai said not to rule out the possibility of a 50 bps hike to 13.75%.
forbes.com
Fixed income investors were hoping that a deteriorating labor market and week industrial production figures from April would result in a more dovish tone at the BCB. Not with inflation at 8%. That’s the old central bank.
This is the new, old central bank. It’s going back to the unsexy, but reliable days of inflation targeting. When Henrique Meirelles was Brazil’s central banker under president Luiz Inacio Lula da Silva, the market loved him.
And I suspect the market will get used to high interest rates in Brazil this year so long as inflation comes to target. Central bank governor Alexandre Tombini is gunning for 5.5% next year. He has a long way to go.
Barclays Capital said today that after reading the meeting minutes, they now expect the benchmark Selic rate to go up another 25 basis points to 13.5%.
“The minutes seem to show a board that continues to have concerns regarding the inflation trajectory, downplays the deterioration of the activity data observed thus far and emphasizes that the monetary policy actions deployed hitherto are still not enough to guarantee the convergence of inflation to the mid-point of the target by the end of 2016,” BarCap analyst Bruno Rovai wrote in New York today.
The central bank increased the regulated energy and gas price outlook for this year, to 11.8% higher from 10.7%. That means year ending inflation has gone to 8.25% from 7.47%, while 2016 is inching above target now.
The central bank is also reducing its expectations for the primary surplus for this year. It’s gone from a percentage target of 1.2% of GDP to a nominal estimate of 66 billion reals, or roughly $22 billion. In percentage terms, that comes out to about 1% of GDP based on Barclays’ estimates.The bank’s inflation forecasts continue to show 2016 missing the target.
Investors, therefore, should assume 14% interest rates are only a matter of time. This is good news for bond buyers, perhaps, who can get amazing yield in the local currency, but not so good for Brazilian companies looking for financing.
While the central bank is not forecasting a 14% interest rate anytime soon, the floor is 12.75% currently, up from 12.25%. The meeting minutes also showed that the bank was mindful of weaker labor markets. If this worsens in the months ahead, then we will see the central bank pause in its hiking cycle unless inflation starts going over 8.25%.
The central bank now sees inflation as its mandate, and the job market and business investment climate will have to depend on state and local factors.The bank’s monetary policy committee repeated the message that it aims to anchor 2016 inflation, making a June hike very likely. Rovai said not to rule out the possibility of a 50 bps hike to 13.75%.
forbes.com
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