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Brazil Hikes Rates as Concerns Grow over Local Markets 0

Apr 17, 2013

Brazil’s central bank raised the benchmark Selic rate on Wednesday for the first time since July 2011, amid growing concerns over rising inflation.

The bank’s board voted 6 to 2 in favor of a 25 basis point hike to 7.5% from a record low – in line with market expectations.

Brazil’s central bank is likely to tighten monetary policy faster than expected to combat resurgent inflation – a move that could stunt the development of local capital markets, experts warned earlier this week at the LatinFinance Brazil Issuers and Investors Forum in Sao Paulo.

Higher interest rates could curb a shift to riskier assets, investors said. "If we are at a turning point where rates return to being higher, the development of the capital markets in Brazil could be much slower than we thought," Julio Callegari, head of fixed income at JPMorgan Asset Management in Brazil, told LatinFinance.

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."

But Callegari said even a shift back to 9% will have costs when US interest rates normalize.

"What is the rate going to be if a couple of years from now the Fed normalizes and US treasuries are back up to 3%-4%?," he said. "There is a major risk we would be forced back to 12%," he added, with harmful effects for Brazil's capital markets.

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 an aggressive policy to cut rates while inflation was 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 Wednesday's 25bp raise.

"We have passed the point of no return," said Marcelo Carvalho head of Latin America research at BNP Paribas. "Inflation has been too high too long and it’s time to wake up. The period of fast consumer spending growth and easy credit is over."

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