Brazil's economic recovery could fuel inflationary pressures, central bank policy makers said on Thursday, reinforcing analyst views the bank was laying the ground for its first interest rate hike since 2008. With recent stimuli chipping away at the remaining slack in the economy, tighter monetary policy could help contain inflation, policy makers said in minutes of their meeting of January 26-27, released on Thursday.
Policy makers pledged to watch over short-term inflationary pressures to keep them from spilling out onto a longer-term horizon. During the recovery, policy makers said, "it falls to monetary policy to keep watch that inflationary pressures are contained." "There was a more hawkish tone," said Newton Rosa, chief economist with SulAmerica Investimentos. "They're signalling that the time to raise rates is getting near."
Arthur Carvalho, chief economist with Ativa brokerage, said, "The minutes are in line with a hike in April." A rate hike in coming weeks would put Brazil among the earliest countries in Latin American to do so after governments in the region slashed rates last year to jump-start flagging economies. But as Brazil's recovery strengthens, overheating becomes a greater concern, and policy makers will prepare to address those worries.
The recovery in Brazil is picking up steam, albeit unevenly. Manufacturing, for example is still struggling, even as retail sales have expanded. The reduction in the factory output gap "could threaten conditions for a benign inflationary outlook," policy makers noted.
If signs point to a stronger inflation scenario, they added, "the monetary policy strategy will be promptly tailored to the circumstances." Recent Brazilian inflation data suggest price pressures are rising. Comments from central bank president Henrique Meirelles have also been taken as hinting at a more hawkish perspective of late. However, Brazil's finance minister, Guido Mantega, said on Thursday that central bank chief Henrique Meirelles is "at ease" with a 5.8 percent rate of growth in Brazil this year.
BRAZILIAN YIELDS SLIP: Analysts saw the minutes as increasing the odds of a rate hike in April rather than March, though not in strong enough terms to yield a consensus among economists. An April hike would push off a tightening cycle through the bank's next monetary policy committee meeting on March 16 and 17 to the meeting of April 27 and 28.
A deteriorating view of the global economy on Thursday added to suggestions that a rate hike might not necessarily come in March. With the expectation of higher rates one meeting farther off, investors pushed yields on Brazilian interest rate futures contracts down in afternoon trade on Thursday.
The yield on the contract due January 2011 slipped to 10.29 percent from 10.35 percent. The yield on the contract due July 2010 edged down to 9.15 percent from 9.18 percent. At last week's meeting policy makers kept Brazil's benchmark Selic rate at a record low 8.75 percent, but substantially modified the wording of the policy statement accompanying their decision.
The statement noted that the central bank would watch the evolution of Brazil's macroeconomic scenario to decide on next steps. Similarities between that statement and others issued in January and March 2008, prompted some analysts to speculate that a rake hike might not come this year until April. In 2008, the central bank began raising rates in April. It reversed course in 2009, chopping 500 basis points off the Selic to revive the then-flagging economy.
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