Brazil's central bank raises tone, signals rate hike

Brazil's central bank will take the necessary measures to bring inflation back to the official target in 2017, signalling it could raise interest rates again, even with the economy in its deepest recession in a generation. Policymakers said in the minutes of the central bank's last rate-setting meeting that they would also aim to lower inflation closer to the centre of the official target range of between 2.5 percent and 6.5 percent next year.
In a rare split vote, the central bank's monetary policy committee, known as Copom, decided last week to keep its benchmark Selic rate at 14.25 percent for the third straight meeting. Two of the Copom's eight members voted to raise the Selic to 14.75 percent. Another rate hike would add pressure to President Dilma Rousseff, an unpopular leftist leader who is scrambling to jumpstart a moribund economy and is now facing impeachment proceedings in Congress.
The central bank is also under the gun to slash inflation that surged above 10 percent to its highest in 12 years despite leading, until recently, one of the world's most aggressive monetary-tightening cycles. "If inflation expectations deteriorate further they will hike in the next meeting," said Cristian Maggio, analyst with TD Securities in London. "If they decide to hike, it will be a one-off adjustment, one of two at the most due to the prior aggressive tightening cycle."
In the minutes, the bank acknowledged that uncertainties over the country's finances have raised inflation expectations, complicating its job further. Some members of its 8-member board believed an immediate hike was needed to reduce the risk of missing the official inflation target again.
Inflation in Brazil has remained well above the 4.5 percent target center even after an aggressive monetary tightening of 700 basis points. A rapidly contracting economy, expected to plunge more than 3 percent this year, has also done little to bring down prices. Behind the resilient high inflation is a weaker Brazilian real and Rousseff's inability to reduce the fiscal deficit amid political upheaval, analysts say. The surprise start of impeachment proceedings against Rousseff on Wednesday deepens the nation's political crisis and may complicate the approval of her package of tax hikes and spending cuts in Congress.