(Bloomberg) -- The Brazilian real slumped to a fresh low for the year after the central bank failed to signal it may hike interest rates at its next meeting, a move that is already priced in by markets spooked by Brazil’s deteriorating inflation outlook.
The real weakened as much as 1.4% against the greenback, leading emerging-market losses amid an increasingly sour sentiment for risk assets. Brazil’s short-maturing swaps declined, reflecting the lower chance of an immediate rate hike, while the long-end of the curve rose as traders adjusted to the increased risk perception.
Brazil’s central bank, led by Roberto Campos Neto, kept the Selic rate unchanged at 10.5% Wednesday, as forecast by analysts. Policymakers adjusted the wording of the statement, now saying there are inflation risks in both directions, but stated that a persistently weaker real, above-target cost-of-living forecasts and resilient services are fueling pressure on prices.
The statement that accompanied the decision was “not as hawkish as it could have been given the deterioration of the inflation outlook and balance of risks,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group, Inc.
Inflation topped all forecasts in early July amid a backdrop of more expensive fuel and a strong labor market. Investors also remain wary about President Luiz Inacio Lula da Silva’s spending plans and fear the monetary authority will become more tolerant toward inflation after Lula names a new governor and two directors this year.
The monetary authority “committed to greater caution, even greater vigilance, but fell short in providing any clear signal that it is contemplating a stronger reaction,” Mario Mesquita, chief economist at Itau Unibanco SA, wrote in a report. “We expect that the benchmark rate will remain unchanged until the end of the year, despite growing concerns about this level being enough to promote convergence.”
Concerns about inflation and fiscal slippage in Brazil have warped the country’s swaps curve, pushing markets to price in rate hikes as soon as September, even as policymakers have given no indication that they plan such a move. That’s helped make the real the worst performing emerging-market currency this year, down more than 15% against the dollar.
Brazil joined two other Latin American central banks that mentioned inflation to justify a more cautious stance on monetary policy Wednesday. Chile paused its yearlong easing cycle, and Colombia delivered a half-point cut in a split vote that indicated push back against faster cuts. The decisions came in contrast with the Federal Reserve’s growing confidence that it should be able to loosen monetary policy soon.
(Updates pricing starting on headline)
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