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SURVEY : Brazil Central Bank Likely To Hold Selic Rate, Change Statement

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02/28/2013 | 10:26am EDT

--Brazil's Selic base rate currently 7.25%, an all-time low

--Twelve-month inflation rate remains above central bank target

--Analysts expects some important changes in central bank communication

By Rogerio Jelmayer and Matthew Cowley

SAO PAULO--Brazil's central bank probably won't alter its key interest rate at next week's monetary policy meeting, but analysts believe officials will change the wording of the accompanying statement to leave the door open for rate hikes should inflation worries persist.

A survey of 14 economists and analysts resulted in the unanimous view that the central bank will hold the Selic base rate steady next week at the current all-time low of 7.25%. The central bank's decision is expected after financial markets close March 6.

Nonetheless, given recent comments by both central bankers and finance ministry officials, the market does expect some signal that, if necessary, interest rates will start to rise. Inflation remains persistently high, at around above 6% per year, and although the market expects this to decline by year-end to around 5.7%, there have been concerns about the central bank's commitment to inflation.

Having brought rates down to a record low, the central bank said it would keep them on hold for a "sufficiently prolonged period" to assure a sustainable recovery for the economy, which has shown meager growth for the last two years. Some economists have become concerned that the central bank is overly worried about restarting growth rather than focusing on its primary job, which is fighting inflation.

But the government has tried to assuage those concerns in recent weeks. In an interview published by The Wall Street Journal Sunday, Central Bank President Alexandre Tombini made a strong case: "Our goal is inflation, so we have to adjust and calibrate our policies to meet our goals," he said. "Growth is not a goal for the central bank."

Finance Minister Guido Mantega followed up on Tuesday, also in an interview with The Wall Street Journal, stating that the central bank is under no political pressure to keep interest rates down. "The central bank has the independence to raise interest rates if it thinks necessary," Mr. Mantega said.

Given those and other comments in recent days, analysts believe the central bank will give some indication of its commitment to fighting inflation on Wednesday by adjusting the post-meeting communique.

"This time I believe that the central bank will take out the expression 'a sufficiently prolonged period of time' to leave the door open for a possible rate hike in the near future," said Itau Unibanco chief economist Ilan Goldfajn.

Whether or not that leads to a rate hike this year remains a subject for heated debate. A number believe that, because inflation expectations for now remain within the target range set by the government, with a maximum limit of 6.5%, the central bank won't raise rates. Others think the central bank will want to demonstrate a firmer grip on inflation and will therefore raise rates.

The next decisions will also carry a political factor, as President Dilma Rousseff will want the economy to be in good shape when she runs for reelection in late 2014. While lowering interest rates to record lows is a big political plus, concerns about inflation could be damaging.

"Bottom line, high inflation has more political costs than high interest rates," said Marcelo Salomon, head of strategy for Latin America at Barclays Capital.

Write to Rogerio jelmayer at rogerio.jelmayer@dowjones.com and Matthew Cowley at matthew.cowley@dowjones.com

Stocks mentioned in the article
ChangeLast1st jan.
EURO / BRAZILIAN REAL (EUR/BRL) -0.69% 4.4635 Delayed Quote.1.74%
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