Surprise inflation in Brazil bets fans on bigger policy rate hike

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(Bloomberg) – Faster-than-expected inflation in Brazil in early October is increasing the pressure for a dramatic increase in the pace of interest rate hikes in the central bank’s policy decision tomorrow.

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Consumer prices jumped 1.2% from the previous month, more than any estimate from a Bloomberg survey, the national statistics office reported on Tuesday. This was the largest increase for mid-October since 1995. Annual inflation accelerated to 10.34%.

Transportation and shelter costs, which rose 2.06% and 1.87% respectively, were the main contributors to the price spike in mid-October, the statistics agency said.

The negative impression comes as policymakers gather for a two-day meeting to set the policy interest rate. Brazil’s central bank is already facing mounting pressure to suppress inflation more sharply after President Jair Bolsonaro said he would expand money transfer programs to the poor ahead of next year’s elections.

What Bloomberg Economics Says

“The inflation surprise is just the latest in a series of issues that Brazil’s central bank will face in this rate decision. Combined with the proposed change in fiscal rules and higher long-term inflation expectations, it is even more difficult for the BCB to stick to its own guidelines and raise the key rate by just 100 basis points to 7.25% at this meeting. “

– Adriana Dupita, Latin American economist

Click here to read the full report.

Read more: Central banker remains alone in the face of Brazil’s collapse in credibility

Swap rates on the contract maturing in January 2023, which indicate investor expectations for the Selic at the end of 2022, jumped 61.5 basis points in morning trading. It was the most traded in Sao Paulo.

Monetary response

This year, policymakers have already raised rates by 425 basis points to mitigate the effects of rising electricity and food costs as the economy rebounds. For weeks central bank chief Roberto Campos Neto had tried to allay investor fears of double-digit inflation, assuring that prices would likely have peaked in September.

Policymakers have previously signaled that a full percentage point rate hike is expected this week, as it aims to bring consumer prices back to the 2022 target of 3.5%. But last week’s announcement that the government would seek to bypass a constitutionally mandated budget limit renewed bets on faster inflation.

Overall, traders are now betting on a rate hike of at least 175 basis points on Wednesday. The implied probability of an increase of more than 150 basis points tomorrow is greater than 30%, depending on options traded on local exchange B3.

“The inflationary trend remains unfavorable and demands a more robust monetary response,” said Daniel Xavier, economist at Banco ABC Brasil.

Expectations of higher borrowing costs are now prompting many analysts to lower their growth forecasts for next year. Meanwhile, job creation remains sluggish with an unemployment rate hovering above 13%.

Economists expect consumer prices in Brazil to end next year at 4.40%, according to a central bank survey released on Monday. Analysts have also raised their forecast for 2023 above this year’s target of 3.25%.

(Add economist commentary, recast story.)

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