Brazilian authorities are likely to tighten monetary policy faster than expected to combat resurgent inflation, experts at LatinFinance’s Brazil Issuers and Investor Forum said Tuesday, on the eve of a central bank interest rate decision.
A consensus emerged among bankers and investors surveyed by LatinFinance at the Sao Paulo event that the central bank’s monetary policy committee will hike rates by at least 25 basis points to 7.5% when it meets on Wednesday.
“We have passed the point of no return,” said Marcelo Carvalho head of Latin America economic research at BNP Paribas, who predicted a 50 basis point hike. “Inflation has been too high too long and it’s time to wake up.”
Neither consumer nor credit growth are likely to be sustained as consumers are increasingly tapped out, he added. “The period of fast consumer spending growth and easy credit is over.”
High inflation is already starting to dampen consumer spending, said José Carlos de Faria, chief economist at Deutsche Bank in Brazil. “The central bank must send a message that it won’t risk inflation,” he said, adding that Brazil must pay the price of the aggressive policy of cutting rates as inflation remains well above target.
Leonardo Porto de Almeida, senior economist at Citi in Brazil, said the central bank should now embark on a tightening cycle to bring rates to 8.75%, starting with 25 basis points on Wednesday, and followed by two consecutive 50 basis point hikes and a final 25 basis point increase.
But Comissão de Valores Imobiliários (CVM) commissioner Ana Novaes insisted that any increase in rates would not undermine a more fundamental shift to a lower interest rate environment. “The big news is that we have long-term lower interest rates,” she said. “No one expects rates to be above 9% to 10% in 2014.”
While the central bank looks poised to tighten policy, the government is keeping fiscal policy loose in an attempt to stimulate growth – a stance that experts warned could take the economy into dangerous territory as authorities relax the primary surplus target.
The government achieved a surplus of 3.1% in 2011 and 2.2% last year but will struggle to meet 2% this year, Almeida said. A further loosening of fiscal policy could tip the fiscal surplus into the “danger zone” of around 1.4%.
The government is also facing tough decisions on exchange rate policy and has flip-flopped on the issue, said Alexei Remizov, managing director of debt capital markets at HSBC. It needs to decide whether to seek to depreciate the currency and boost competitiveness for Brazilian industry or keep the currency strong to fight inflation, he said.
Authorities were also urged to act fast to bolster growth by tackling imbalances in the Brazilian economy, including tension between monetary and fiscal policies, and addressing what experts see as a wrong-headed emphasis on short-term consumption over long-term savings and investment.
China’s slowdown and the end of quantitative easing and eventual policy tightening in the US are the two factors experts said should be of most concern to Brazil, experts agreed. Remizov said a slowing China presents a “significant risk” for Brazil while Carvalho noted that when US rates rise “we will see who is swimming naked.”
Authorities were also urged to adopt more consistent policies in order to encourage long-term investment. There seem to be several different objectives by different policy setters,” says Carvalho.
Almeida expects output to expand by 3.6% this year, driven primarily by consumption, accelerating to 4% next year with 0.9% likely in the first quarter. Faria predicted a more cautious 3.3% thanks to the very low rates and fiscal stimulus and the first signs of a rebound in investments after a disappointing 2012.
Remizov said consumption was starting to slump and predicted GDP will trail the government estimate, coming in at just 2.6% Consumers have become overleveraged while investment in the corporate sector has peaked, added said.
Carvalho predicted growth of around 3% in 2013. “It will be lower than Brazil is aiming for but more than we can afford with our current rate of inflation,” he said.