End in sight for Brazilian rate rises

End in sight for Brazilian rate rises

Economy & Policy

Brazil’s central bank is likely to wind back interest rate hikes at its next meetings, analysts said on Thursday after the monetary policy committee published the minutes of its most recent meeting.

The committee, Copom, said while the global economy was picking up, activity in Brazil was moderating. Analysts interpreted the comments as a signal that the benchmark Selic rate may rise by 25 basis points at Copom’s next meeting in February — but that could be the last increase for the year.

“Given [Copom’s] extensive explanation on a more benign reading of the domestic economy, we believe the tightening cycle is near the end,” said economists at Bradesco BBI.

That view was reinforced by lower than expected inflation data published also on Thursday. Brazil’s IPCA data indicated annual inflation of 5.63% to January, down from 5.85% in December.

Brazil began a tightening cycle in April 2013, when Copom raised the Selic rate by 25 basis points. At each of the six subsequent meetings it has lifted rates by 50 basis points. The Selic stands at 10.5%.

Analysts at Bank of America Merrill Lynch, Barclays, Bradesco, Goldman Sachs and Itaú predict the central bank will slow the pace of rate hikes at its next meeting on February 26.

“It is the combination of weaker growth and slowing inflation that should push the BCB to moderate the pace of hikes in February,” said analysts at Barclays. The investment bank expects rate-setting committee to hold the Selic at 10.75% this year, after a 25bp raise at the next meeting.

Economists at Itaú BBA also forecast a 25bp rate hike in February, saying that subsequent moves will depend on data.

Goldman Sachs analyst Alberto Ramos noted that Copom has been emphasizing its uninterrupted rate rises since April and the fact that those will have a lagging effect on Brazil’s sticky inflation data. “All this, in our assessment, indicates that although the Copom will extend the tightening cycle, it is on track to taper the magnitude of rate hikes.” LF