Despite applause for its 50 basis points rate rise Wednesday, the Brazilian central bank’s decision has opened questions over the extent of the tightening cycle, with some fearing it will be short-lived.
Members of Copom, the rate setting committee of Brazil’s central bank, unanimously voted to increase rates by 50 basis points to 8.0% at their May 29 meeting. Analysts – divided ahead of the decision on whether rates would go up 25bp or 50bp – praised the move, saying it showed the central bank taking a sharp line on inflation.
But they said they worried the bank was simply bringing forward a small rate hike, rather than launching a new, aggressive strategy. Goldman Sachs economist Alberto Ramos said in a report there was a risk the decision was just a front-loading move.
“In order to consolidate today’s positive and welcome surprise the Copom will have to resist the temptation to end the cycle prematurely,” he wrote Wednesday.
Barclays analysts described the move as “bolder” than they had expected, but raised similar fears. “We believe the biggest doubt that will remain in the market is whether this movement was an acceleration of the pace and hence the tightening cycle will be larger than the market had priced, or whether the Copom was front-loading a smaller adjustment in rates,” they said in a report.
|| Brazilian central bank chief Alexandre Tombini
The rate rise is positive for Brazilian equities and the real – which weakened on Wednesday on disappointing GDP growth figures – and is likely to spur a curve flattening, analysts at RBS wrote.
But analysts also question how effective the move will be to return inflation to the target, especially with the government expected to continue with a fiscal expansion to lift the economy. Inflation expectations for 2014 stand at 5.8% according to Goldman Sachs. The Brazilian Central Bank targets a 4.5% inflation rate, with a two point tolerance band on each side.
Minutes from the Copom meeting, to be published on June 6, will now be closely scrutinized for indications of Copom’s thinking. The center of the inflation target may be in sight, and the bank could return to cutting rates next year, Nomura analysts said.
“We need to read the minutes and see if in fact this Copom decision is announcing a new, non-gradualist and operationally independent BCB that has abandoned its dual-mandate indecision and has opted to deal decisively with inflation,” they wrote.
Borrowers keep watch
The move came as borrowers watched rates internationally and Brazil’s debt market issuers tried to judge how long historically low borrowing rates would last. “Since [the market is] talking about lowest-ever prices, everybody is trying to issue a transaction at those levels,” Construtora Norberto Odebrecht CFO Jayme Fonseca told LatinFinance the day ahead of the Copom decision.
“I’m not sure if those levels are achievable right now.” LF