Brazil Bank May Keep Rate Unchanged, Ignoring Pressure for Cut

By Andre Soliani and Joshua Goodman
Dec. 10 (Bloomberg) -- Brazil’s central bank may keep the benchmark interest rate unchanged at a two-year high on inflation concerns, ignoring political pressure for an immediate cut to revive a slowing economy.
Policy makers, led by central bank President Henrique Meirelles, will keep the rate at 13.75 percent for a second straight meeting on Dec. 10, according to 44 of 46 analysts surveyed by Bloomberg. The remaining two expect a cut of at least a quarter point.
While the first simultaneous recession since World War II in the U.S., Europe and Japan looms over Brazil, inflation has run above target for almost a year, spurred by a weakening currency and higher food prices. That’s limiting the bank’s room for a rate cut aimed at boosting economic growth.
“We could end up in the worst of worlds: inflation with recession,” said Paulo Vieira da Cunha, a voting member of the bank’s board until last December. “The prospect is that a central bank fundamentally concerned with inflation will wait a bit more before making its next move.”
Top officials of the government, which legally controls the bank, are pressing for a cut, arguing Brazil’s high interest costs are hurting companies while slowing growth has pushed back inflationary pressures. Vice-President Jose Alencar on Dec. 5 called the country’s rates “absurd” because Brazil’s inflation isn’t demand driven. Three days earlier, Budget Minister Paulo Bernardo was speculating on when the bank will “have room” to make a cut.
Threat to Autonomy
Folha Online, the Web service of Brazil’s largest newspaper, reported Dec. 7 that Lula may curb the central bank’s autonomy should policy makers fail to lower rates this week or at least signal they’re prepared to start cuts next year. The service didn’t say where it got the information.
In a Bloomberg Television interview yesterday Development Minister Miguel Jorge said a rate cut would “be an extremely positive signal,” for companies.
Vieira da Cunha, a partner at Tandem Global Partners LLC, said in an interview from New York that policy makers will only make a cut once it’s clear inflationary pressure stemming from the currency meltdown has been “dissipated” by slower growth.
The Brazilian real slid almost 35 percent against the dollar since September raising concerns weaker currency may stoke inflation already running near the 6.5 percent upper limit of the government’s target range. Annual consumer prices climbed 6.39 percent in November.
Lower Forecasts
Industrial production grew more slowly than economists expected in October, prompting banks and analysts to cut forecasts for next year. The economy will shrink in the last quarter of 2008 for the first time in more than two years on slumping demand in Brazil and abroad, HSBC said earlier this week.
Economic growth will probably slow by more than half to 2.5 percent next year, according to the median estimate of about 100 economists in a central bank survey published Dec. 8.
“October’s figures increased pressure inside and outside the government for rate cuts,” Roberto Padovani, chief economist at Banco WestLB do Brasil in Sao Paulo, said. “But the central bank won’t yield to pressure and will wait for more information before its next move, which I expect to be a cut.”
Policy makers won’t be able to lower rates until the slide in the currency ends, Senator Aloizio Mercadante, a member of Lula’s Workers’ Party, said last week. Mercadante helped Lula bring in Meirelles as his first and only central bank president in 2003.
Inflation
Economists in the central bank survey forecast consumer prices will rise 5.2 percent next year, while policy makers pledged at their July 22-23 meeting to act “vigorously” to bring inflation back to 4.5 percent in 2009.
To be sure, Brazil’s economy, the largest in Latin America, unexpectedly expanded at the fastest pace in four years in the third quarter, as consumer demand soared before the credit crisis hit, a report yesterday showed. Gross domestic product jumped 6.8 percent from a year earlier, more than any of the 31 economists in a Bloomberg survey predicted, from a revised 6.2 percent gain in the previous three months.
Those figures don’t reflect what happened to Brazil’s $1.3 trillion dollar economy in the past two months, Padovani said.
The automobile industry, which accounts for 5 percent of GDP, reported new-vehicle sales plunged 25 percent in November, the biggest drop in five years.
Companies such Cia. Vale do Rio Doce, the world’s biggest iron-ore producer, have scaled back operations since September. Vale sliced iron-ore output by 10 percent on an “unprecedented contraction” in global demand, firing 1,300 workers and laying off 5,500. Sadia SA, Brazil’s second-biggest food maker, delayed investments to build a 700 million reais facility in Santa Catarina state.
“We’re in the eye of the hurricane and it’s still too early to know what the real impact of the crisis on growth and inflation,” said Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA in Sao Paulo, said. “Brazil’s economy lives a paradox: while economic activity is slowing, inflation remains at a quick pace.”