Meirelles Signals More Brazil Rate Increases Coming (Update1)
By Andre Soliani and Heloiza Canassa
June 5 (Bloomberg) -- Brazil's central bank President Henrique Meirelles signaled policy makers will raise the benchmark lending rate further to bring inflation down from a two-year high in Latin America's largest economy.
The eight-member board increased the rate to 12.25 percent from 11.75 percent late yesterday, matching the expectations of economists surveyed by Bloomberg. It was the second rate increase in three years in Brazil.
The central bank is making borrowing more expensive to head off inflation spurred by higher food prices and growing consumer demand for cars and other big-ticket items. Brazil's economy grew 6.2 percent in last year's fourth quarter, more than twice the pace of the past decade. Bank lending has almost doubled in the past three years.
``The Brazilian central bank recognizes the real problem of inflation,'' Fitch Ratings senior director Shelly Shetty said at a presentation in New York today. ``They have a game plan and they are executing it.''
Inflation in Brazil climbed from an eight-year low of 3 percent in March 2007 to 5.25 percent through mid-May, above policy makers' 4.5 percent year-end target for a fifth month.
``The rate adjustment cycle has just started,'' Hugo Penteado, chief economist for Banco Real Administradora de Recursos, said in an interview.
Penteado expects the central bank will raise rates another 2 percentage points by the end of the year, a move that he believes will control inflationary pressure.
Statement Change
``Continuing the adjustment process of the benchmark interest rate, which was initiated at the April meeting, the Copom decided unanimously to raise the Selic rate to 12.25 percent,'' the bank said in a statement last night.
The bank removed language from its April 16 statement saying it had carried out a ``significant part'' of the tightening process. Marcelo Carvalho, chief economist for Brazil at Morgan Stanley, said the most recent statement is more ``open-ended.''
``The tightening cycle may be longer than the previous statement indicated,'' Carvalho said in an interview. ``The central bank signaled they will increase the rate as much as needed.''
The bank's half-point increase met the expectations of 28 of 40 economists surveyed by Bloomberg. Eleven analysts forecast a three-quarter-point increase and one expected no change.
Real Trading
The Brazilian real was little changed at 1.6293 per dollar at 11:38 a.m. New York time. The currency has surged 19 percent in the past 12 months, the biggest gain among the 16 most- actively traded currencies versus the dollar.
The central bank will raise interest rates to 13.75 percent by the end of the year, a central bank survey of economists shows. Last night's half-point rate increase pushes the real interest rate, which is the rate after adjusting for inflation, to 7 percent, the highest among 52 leading economies tracked by Bloomberg.
The bank in October held the benchmark rate at 11.25 percent, ending the longest cycle of cuts since Brazil adopted inflation targets in 1999.
Meirelles told Brazilian lawmakers May 28 that bank policy makers will act to prevent rising wholesale industrial and agricultural costs from spreading to consumers as household demand expands at a record pace. The IGP-M inflation index, which has a 60 percent weighting in wholesale prices, surged to a three-year high of 11.53 percent in May.
Bank Lending
Lending by banks has climbed at least 20 percent in each of the past three years. Retail sales jumped 11.4 percent in March, capping the strongest quarter on record. Industrial production jumped 10.1 percent in April from a year earlier, the highest in six months.
Brazilian President Luiz Inacio Lula da Silva and his predecessor, Fernando Henrique Cardoso, have bolstered investor confidence in the country by underscoring the government's commitment to battling inflation.
Lula's moves to cut the budget deficit and allow the central bank to operate independently helped win Brazil an investment grade credit rating. Last week Lula ignored calls from his party to boost spending and instead ordered an $8 billion budget cut.
Annual inflation, as measured by the benchmark IPCA index, reached a record 4,922 percent in mid-1994. The index, which averaged 400 percent a year between 1980 and 2007, fell below 10 percent for the first time in 1996.
10th-Biggest Economy
Under Lula, Brazil has become the world's 10th-biggest economy, up from 14th biggest when he took office in 2003, according to International Monetary Fund data.
Brazil is the only major economy in Latin America with an investment grade rating on its debt that has managed to keep inflation within its target. Chile's annual inflation is at 8.5 percent, more than double the upper end of the 2 percent to 4 percent target range. In Mexico, consumer prices jumped to 4.55 percent in April, more than half a point above the top of the target range.
