With 25 bp Hike, Brazil Moves Further Behind The Curve
By Win Thin
Brazil central bank hiked rates by 25 bp to 12.0% by a vote of 5-2, with the 2 dissenters voting for a 50 bp hike. This was the first 25 bp move in the current cycle and was less than expected, as market expectations had been for 50 bp earlier this month but swung more towards 25 bp this past week on more dovish signals from officials. Of 58 analysts polled by Bloomberg, 2 had no hike, 15 had a 25 bp hike, and 41 had a 50 bp hike. We think this decision was a mistake, especially since mid-April IPCA inflation came in at 6.44%, just a whisker below the 6.5% ceiling. This is the highest y/y rate since mid-July 2005, when the policy rate was at its high of 19.75% for that cycle. We expect 25-50 bp of tightening when COPOM next meets June 7/8 meeting, as we believe the inflation trajectory is still one of deterioration, not improvement. Indeed, that inflation ceiling is likely to be breached in Q2, and it remains to be seen when it will start to fall back into the target range given the lack of more aggressive measures on the part of policy-makers. Loan and money growth remains too high, and we believe fiscal policy remains too loose.
Still, the 25 bp hike suggests that markets should be prepared for some more aggressive macroprudential measures in the pipeline. At this point, Brazil seems determined to limit orthodox rate hikes in favor of unorthodox macroprudential measures, which to us is clearly not working. We suspect that the 25 bp hike will be neutral to negative for BRL, and negative for the Bovespa and local bonds as the bank moves further behind the curve. If risk on trading continues, however, the real is likely to gain regardless of today’s move. Perhaps the central bank was swayed towards 25 bp after USD/BRL touched a new multi-year low Wednesday near 1.55. A move below 1.55 towards 1.50 is also likely to bring on more FX measures, but policy-makers seem to be putting up less of a stink regarding currency strength in recent weeks.