(Bloomberg) -- Brazil’s real weakened after central bank chief Roberto Campos Neto signaled interest rate hikes are less certain than markets forecast, underwhelming investors who see a tightening cycle starting next month.
In a Tuesday interview with O Globo newspaper, Campos Neto said that while policymakers indicated they would raise the benchmark Selic from its current level of 10.5% if necessary, he does not remember mentioning a rate hike. He called for calmness and caution in times of volatility, saying the international outlook has improved and above-target inflation will slow.
The real fell as much as 1.5% — one of the biggest drops in emerging markets — while the swap curve steepened, indicating traders pared bets on rate hikes starting in September. The comments sounded dovish in light of prior remarks from influential board member Gabriel Galipolo, who said Selic rises are on the table. More broadly, it’s a change from earlier this year, when Campos Neto — and not Galipolo — was seen as being relatively tougher on policy.
Campos Neto “is signaling that the interest rate hike is far from being a consensus at the monetary policy committee,” said Marcelo Matsmoto, treasury director at Mizuho Bank, adding that this stance was “casting doubts” on the most aggressive market bets for monetary tightening.
The central bank does not only depend on financial market forecasts, and it will also consider the broader economic scenario at the next rate-setting meeting, Campos Neto told O Globo.
“When the central bank governor talks about remaining calm, that could mean doing nothing” on rates, said former central bank International Affairs Director Tony Volpon. “He is striking a neutral to dovish tone.”
Short-Term Noise
Central bankers signaled earlier this month they would not hesitate to raise borrowing costs in the face of a worsening inflation outlook. Galipolo, widely considered Campos Neto’s likeliest successor when his term ends this year, has said policymakers will do whatever it takes to bring inflation back to target, hammering home the idea that rate increases are an option.
By contrast, investors grew increasingly nervous that the central bank would become more lenient toward inflation when some board members including Galipolo — all of whom had been nominated by leftist President Luiz Inacio Lula da Silva — backed a larger rate cut in a controversial, split policy vote in May.
At an event on Tuesday morning, Campos Neto said the message from policymakers hasn’t changed since they signaled their openness to rate hikes in the minutes of their July meeting. At the same time, the bank remains data dependent and focused on more issues than just “short-term noise,” he said.
“If we need to raise rates, then we’ll raise them,” Campos Neto said.
Furthermore, he added, the international scenario has improved as the global economy decelerates and amid signals that the Federal Reserve may begin cutting rates in the US. Campos Neto said last week he expected Brazil’s inflation to slow in upcoming prints.
Speaking at the same event, Finance Minister Fernando Haddad said that Brazil’s “very tight” monetary policy could hurt its inflation fight on the supply side.
--With assistance from Maria Eloisa Capurro.
(Re-casts story, updates market moves in third paragraph)
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