Brazil Central Bank May Hold Rates on Currency Drop: Week Ahead

By Joshua Goodman
Dec. 8 (Bloomberg) -- Brazil’s central bank may hold its benchmark interest rate at a two-year high this week as it gauges whether the slowing economy will lessen the impact of a weakening currency on inflation.
Policy makers led by President Henrique Meirelles will keep the overnight rate at 13.75 percent for the second consecutive meeting, according to 19 of 21 economists surveyed by Bloomberg. The other two analysts forecast a reduction.
Brazil, Latin America’s largest economy, may be heading toward a technical recession as the global crisis crimps consumer spending and export demand, Morgan Stanley said in a report last week. Yet inflation remains close to the upper limit of the government’s target band, stoked by a three-month, 29 percent slide in the local currency against the U.S. dollar.
“The central bank doesn’t operate like the Federal Reserve; its only mandate is to control prices,” said Carlos Thadeu de Freitas, chief economist at SLW Asset Management. “Until the real stabilizes, and merchants replenish their stocks, we won’t see the full impact on inflation from the devaluation.”
Annual inflation in November slowed to 6.39 percent from 6.41 percent the previous month, surprising all 40 analysts in a Bloomberg survey who were predicting the index would quicken. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.
Economic growth in Brazil will moderate to 2.8 percent next year, its slowest pace since 2003, from 5.2 percent in 2008, according to the latest central bank survey of economists published last week.
Interest-Rate Cuts
Vendors afraid of losing sales at a time of sluggish demand have so far been absorbing most of the impact of higher prices for imported components and dollar-priced commodities, said Thadeu de Freitas. Economists are split over whether a continued slide in the currency will flame inflation in a context of restrained credit and declining activity.
RBC Capital Markets on Nov. 28 said the central bank will start cutting rates as early as March in response to the “severity” of the global crisis. Thadeu de Freitas said monetary easing won’t begin until the fourth quarter of 2009.
The deteriorating economic outlook won’t be reflected when the national statistics agency releases third-quarter economic growth report on Dec. 9, economists said. Gross domestic product, the broadest measures of goods and services, probably jumped 6 percent in the third quarter from a year earlier, according to a Bloomberg survey of five economists.
Markets
Last week, the real fell 5.2 percent to 2.4335 per dollar, paring losses after the central bank stepped up interventions to shore up the currency. The yield on the government’s zero-coupon bond due January 2010 fell 1.21 percentage points to 13.43 percent, according to Banco Votorantim.
The benchmark Bovespa index dropped 3.4 percent to 35347.39 points. Cosan SA Industria e Comercio, the world’s second-biggest sugar-cane processor, fell 17 percent, leading decliners. Tam SA, Brazil’s largest airline by market value, was the biggest gainer with a 25 percent advance.
The following is a list of events in Brazil this week:

Event Date
Weekly Trade Balance 12/08
Third-Quarter GDP 12/09
FGV Inflation Preview - IGP-M 12/10
Central Bank Rate Decision 12/10