Brazil set to raise interest rates again despite recession fears
Brazil is poised to raise interest rates by 50 basis points on Wednesday for the fifth straight time, maintaining its tight money campaign to battle inflation despite fears it could worsen an expected economic recession.business Updated: Jun 03, 2015 12:46 IST
Brazil is poised to raise interest rates by 50 basis points on Wednesday for the fifth straight time, maintaining its tight money campaign to battle inflation despite fears it could worsen an expected economic recession.
Forty-eight of the 49 economists surveyed by Reuters last week expect the central bank's monetary policy committee, known as Copom, to raise its benchmark Selic rate to 13.75%, bringing borrowing costs to a six-year high. The only dissenting economist sees a rate increase of 25 basis points.
The central bank has led one of the boldest rate increase cycles in the world this year to bring down inflation that is at an 11-year high, denting consumer spending and damaging its own reputation as a guardian of price stability.
Central bank chief Alexandre Tombini repeated recently that the bank still has work to do to make good on its promise to bring inflation from 8.17% to the 4.5% center of the official target in late 2016.
"The pursuit to regain credibility and reduce inflation expectation will likely lead the Copom to keep the pace of tightening," Barclays' economist Bruno Rovai said in a note to clients last week.
Rovai said that, after the increase, the bank could either keep raising rates to anchor inflation expectations or end the cycle with a 25-basis-point increase at its next meeting on July 29.
Tombini and fellow board members have not publicly outlined an exit plan from the cycle that has raised the Selic by 225 basis points in just over six months.
The bank is under pressure from business leaders, politicians and even other officials within the government to halt the increases that threaten to deepen what is expected to be the country's worst recession in 25 years.
The Brazilian economy is forecast to contract 1.3% this year as investment sinks and business confidence remains at record lows, according to the latest central bank poll of economists.
In a move that surprised many observes, the bank eased reserve requirements last week to free up 25 billion reais in new funding for mortgages and agribusiness loans.
The bank said it adopted other measures to ease the inflationary impact of the stimulus, but many analysts saw the move as a sign policymakers are worried about slowing activity and job losses.