(Bloomberg) -- Brazil’s possible cycle of monetary tightening would be gradual, central bank chief Roberto Campos Neto said on Friday as he sought to temper investor bets on large interest rate hikes starting next month.
“If and when there is a cycle of interest rate increases, it will be gradual,” Campos Neto said at an event organized by XP Investimentos. Still, the bank will remain data dependent and refrain from giving guidance on its next steps, he said. “The moment requires flexibility.”
Board members have held rates steady at 10.5% since June, saying “all options” are on the table ahead of their policy meeting next month. Latin America’s largest economy is facing resurgent price pressures as activity exceeds expectations amid a tight job market. While trader bets are divided between a quarter-point and half-point hike in September, Campos Neto signaled investors have gone too far in their wagers for near-term tightening.
“The risk priced into the short-end of the yield curve isn’t compatible with the central bank’s message,” he said, prompting swap rates to decline as investors pared odds of a half-point increase.
Brazil’s annual inflation cooled slightly in early August to 4.35%, though core measures excluding volatile items like energy and food picked up. The latest consumer price print was an “improvement” but the bank needs to see “greater convergence” to its 3% goal, Campos Neto said.
Hiking Cycle
On Friday, analysts at JPMorgan Chase & Co. wrote that they forecast a “mini hiking cycle” with a quarter-point lift next month, followed by three additional rises of the same size, taking borrowing costs to 11.5% in early 2025.
Other banks including Wells Fargo as well as asset managers such as XP Investimentos and Legacy also see monetary tightening beginning in September.
Brazil President Luiz Inacio Lula da Silva said on Friday that he would be fine with the idea of having his nominee for the next central bank governor, Gabriel Galipolo, raise rates if needed. Lula said that, while there needs to be “an explanation” for changes to borrowing costs, Galipolo would have autonomy within the central bank.
The bank’s role “isn’t only to set interest rates, it has to have a growth target as well,” Lula added. Galipolo’s nomination still needs to be confirmed by the Senate before he can replace Campos Neto, whose mandate ends in December.
“I certainly think a hike is possible under his mandate,” Brendan McKenna, a strategist at Wells Fargo, said of Galipolo. “President Lula’s message is more agreeable with tighter monetary policy. It has been a notable change in language that can take a lot of pressure off the bank.”
Galipolo recently said a rate hike is “on the table” while stressing that all board members are willing to do “whatever it takes” to slow inflation back to target.
Separately, the central bank said it would auction up to 30,000 FX swaps on Friday, the equivalent of almost $1.5 billion. The move comes on top of a dollar spot sale earlier in the day, marking the institution’s first intervention in years.
(Adds more comments from Campos Neto starting in second paragraph, economist remarks starting in sixth)
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