(Bloomberg) -- Brazil’s central bank needs to change course and raise interest rates by nearly two percentage points over the next six months to douse a heated economy and tame inflation expectations, a former director said.
Policymakers should start with a quarter percentage-point rate rise this month, followed by two half-point hikes in November and December, former central bank International Affairs Director Fernanda Guardado said in an interview Wednesday. The bank could then slow the pace of tightening, taking the Selic to 12.25% by March, she added.
“If the central bank holds rates, then they will have to explain very emphatically how the economy will cool off,” said Guardado, 44, now head of research for Latin America at BNP Paribas.
President Luiz Inacio Lula da Silva’s budget shows no sign of shrinking, the labor market is tight and growth came in above expectations in the second quarter, she said.
“It’s hard to see how the economy could slow down if not through monetary policy,” she said.
Brazilian central bankers have refrained from providing guidance for their September meeting, saying that “all options” are on the table, including a hike. Price pressures have picked up in Latin America’s largest economy, as low unemployment and strong growth challenge efforts to tame inflation.
“If and when” the bank decides to tighten again, it will do so “gradually,” Governor Roberto Campos Neto said last week.
Guardado’s forecast spotlights how drastically Brazil’s monetary policy outlook has changed in recent months. Central bankers were easing as recently as May before pausing their nearly yearlong campaign in June, with rates at 10.5%.
Since then, Brazil’s gross domestic product report showed that the economy expanded a faster-than-expected 1.4% in the second quarter, driven by public spending and household consumption. By contrast, the economies of regional peers Mexico, Chile and Colombia posted a meager expansion or contracted.
At the same time, Brazil’s annual inflation rate barely slowed in early August, standing at 4.35%. Economists surveyed by the central bank see inflation remaining at least half a percentage-point above the 3% target through 2027.
A “fine tuning” of interest rates is needed and “could be sufficient to hit the inflation target in 18 months,” said Guardado, who holds a doctorate in economics from Pontificia Universidade Catolica do Rio de Janeiro.
Too Much, Too Fast
While at the bank, Guardado cast a dissenting vote at the beginning of the most recent easing cycle, when she backed a smaller initial cut, thereby cementing her reputation as one of the board’s hawks.
“With the benefit of hindsight, it would have been more prudent to cut with caution,” she said. “The easing cycle went further than the economy permitted, and now an adjustment is needed.”
Guardado sees annual inflation at 4% both this year and next, though those estimates are under revision. Likewise, while she currently expects the economy to expand 2.4% in 2024, that forecast will likely be raised.
In May, a split vote stoked investor concerns that the institution was becoming more lenient toward inflation. All four members appointed by Lula favored a half percentage-point cut, while the majority led by Campos Neto decided on a quarter-point drop.
Board members have since voted unanimously, and in public speeches have reiterated that there’s “cohesion” in their views.
Although policymakers should be free to dissent, “it’s important that September’s rate decision is unanimous” to give credibility to a possible tightening cycle, Guardado said. The bank could provide guidance for its next rate move, but should avoid signaling the magnitude of the hiking cycle, she said.
“It’s important the communication is direct and simple,” she said.
Calm and Serene
Last week, Lula appointed Monetary Policy Director Gabriel Galipolo to replace Campos Neto, whose mandate will end in December. The senate must still approve Galipolo’s nomination before he assumes the post.
“Galipolo is calm and serene, which are important characteristics for a central bank governor,” Guardado said. “His recent comments make clear the determination he has to do what’s necessary for Brazil to have price convergence.”
Appointed in 2021, Guardado is one of the few women to have served on the bank’s board. During public appearances, she made a point of wearing deep red lipstick to stand out as one of the minority of women in monetary policy circles.
“There are still many barriers that women need to overcome during their careers, many of them invisible,” she explained. “It was a way to say: I’m woman and I’m here.”
(Updates with more details from the interview throughout)
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