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
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
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
"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."