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
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
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.