June 07, 2014

BRASILIA: The Brazilian economy will grow less this year than in 2013, but policymakers remain on their guard to battle high inflation, the central bank (CB) said, signaling borrowing costs could remain on hold for some time.

In the minutes of the central bank’s last interest rate setting meeting, the monetary authority warned that prices remain high in Latin America’s largest economy.

The bank kept its benchmark Selic rate on hold at 11 per cent last week, but signaled policymakers are prepared to hike rates again if needed to curb any surge in prices.

Many economists said further tightening would probably be needed to bring inflation back to the center of the official target range of between 2.5 per cent and 6.5 per cent. But some have recently raised the possibility that the bank could actually cut rates next year if the economy slows further or falls into a recession.

“In the minutes, the bank remains very worried about the inflation outlook and that should dissipate these views that the bank could cut rates,” said Juan Jensen, chief economist with Sao Paulo-based consultancy Tendencias. “The bank is signaling it will keep rates on hold for some time.”

Double-digit interest rates, sagging business confidence and a still subdued global economy have dragged down activity in Brazil, once one of the world’s fastest-growing economies. The Brazilian economy is expected to grow only 1.5 per cent this year, down from 2.5 per cent in 2013.

A sharp slowdown of economic activity in the first quarter has prompted many economists to cut their economic estimates for the year, foretelling a fourth straight year of lackluster growth.

The bank seemed to follow that sentiment and said in the minutes that “the pace of domestic activity tends to be less intense this year, compared to 2013.” In the previous minutes, the bank had said the pace of activity was going to remain stable.

Still, the central bank said that it will remain vigilant to counter high prices and pointed to inflationary pressures such as the likely increase of some government regulated prices and convergence of domestic prices with international ones.

The bank changed the language from its past minutes to say that part of the effects of previous rate increases will still materialize. It also dropped previous reference to cumulative and lagging impact of monetary policy on prices.

The bank said both its 2014 and 2015 inflation estimates were reduced from previous meetings.

For Icatu Vanguarda economist Rodrigo Melo the bank is signaling it will keep rates on hold for as long as possible.

“These are the minutes of a bank that stopped (hiking rates) and wants to stay put for a while. Unless you have a reversion of the outlook,” he said.

Brazil removed a 6 per cent tax on some short-term foreign loans on Wednesday in a move that could help the central bank stem a recent depreciation of the local currency that has threatened to stoke iflation.

Authorities were caught off guard on Monday by a rapid drop in the value of the real BRBY, which slid 1.5 per cent to its lowest in nearly two months on speculation that the central bank may reduce its intervention program in the foreign exchange market.