Meirelles Cements Expectations Brazil Rate Won’t Change in 2009

By Joshua Goodman and Andre Soliani
Sept. 3 (Bloomberg) -- Brazil’s central bank, after ending seven months of monetary easing yesterday, signaled that inflation remains under control, cementing expectations it will leave borrowing costs at a record low for the rest of the year.
Policy makers voted unanimously to keep the benchmark rate at 8.75 percent, matching the forecast of 49 of 50 analysts surveyed by Bloomberg. The current rate is “consistent” with a “benign” inflationary outlook and economic recovery, the board, led by President Henrique Meirelles, said a statement.
The comments indicate the board will leave borrowing costs unchanged until at least the middle of next year, said Silvio Campos Neto, chief economist at Banco Schahin SA. Jankiel Santos, chief of economist at Banco Espirito Santo de Investimento, said rates will be on hold for at least 16 months.
“The statement was clear,” Neto said in a telephone interview from Sao Paulo. “The bank signaled it entered in a wait-and-see stance to test the reaction of the economy to this unheard-of level of rates.”
Latin America’s biggest economy is emerging from its first recession since 2003, powered by local demand. Industrial production expanded in the past seven months, companies resumed hiring and retail sales have returned to pre-crisis levels. Gross domestic product, after contracting in the last quarter of 2008 and first quarter this year, will grow 1.5 percent in the second quarter from the first quarter, according to BNP Paribas.
“The crisis has been overcome,” said Pedro Paulo Silveira, chief economist at brokerage Gradual Corretora. “Brazil’s economy is recovering faster than the developed, industrialized nations. We will start next year with an economy ready to expand 4.5 to 5 percent.”
Economic Recovery
That’s below the 6.8 percent annual pace the economy was growing before the financial crisis choked credit markets, reduced global demand for Brazil’s commodity exports and rattled investors.
As economic growth recovers gradually, economists agree there is little chance that lower borrowing rates would stoke inflation, which slowed to 4.5 percent in July, the lowest rate since December 2007. The IGP-M price index, a gauge of wholesale prices by which costs for home rentals and utility rates are adjusted, turned negative in July for the first time since 2006.
Still, traders expect interest rates will rise to 9.4 percent by April 2010, according to estimates based on overnight interest rate-futures contracts, even as inflation is forecast to remain below the government’s 4.5 percent target until 2011, according to a central bank survey.
Production Data
Industrial output rose 2.2 percent in July from June, its biggest gain in more than a year, as lower interest rates, tax cuts and increased government spending helped stimulate activity. GDP may shrink 0.3 percent this year before rising 4 percent in 2010, according to the central bank survey of economists taken Aug. 28.
Total outstanding loans rose 2.6 percent to a record 1.31 trillion reais ($688.2 billion) in July, the fastest monthly expansion since October. Lending climbed 20.8 percent from the same month last year.
Analysts forecast the benchmark rate will reach 9.25 percent by the end of 2010, according to the central bank survey.
Meirelles slashed the benchmark interest rate from a two- year high of 13.75 percent in January and injected about $100 billion into money and currency markets to boost loans to companies and consumers amid the global credit crunch.
The government has also lowered taxes on cars and electronics, pushing retail sales 1.7 percent higher in June from May, more than was forecast by economists.
Short-Lived Gains
The gains may be short-lived as the positive impact on growth from the stimulus runs out, said Carlos Thadeu de Freitas, chief economist at SLW Asset Management. Along with BNP, he is forecasting interest rates will be a quarter point to half point lower at the beginning of 2010, as Chinese demand slows for commodities.
Production of capital goods, a barometer of investment, fell 24 percent in July, about six times the 4.1 percent yearly decline in output of consumer goods.
“There’s a lot of one-time events that won’t be repeated, like people pushing up the purchase of cars to take advantage of tax breaks,” Freitas said before yesterday’s decision.