(Bloomberg) -- Brazil’s central bank is widely expected to increase its key interest rate by half a percentage point on Wednesday, twice as much as in its previous monetary policy meeting, as investors worried about public spending push inflation estimates further above target.
All economists in a Bloomberg survey forecast that policymakers led by Roberto Campos Neto will lift the benchmark Selic to 11.25% as part of a tightening campaign that started in September. Most traders agree, pricing into the local digital options market a chance of less than 10% of a bigger 75-point increase.
Since taking office in 2023, President Luiz Inacio Lula da Silva’s push to boost household income has fueled larger-than-expected growth in Latin America’s largest economy. Credit flows and consumption are rising despite double-digit borrowing costs, underpinned by low unemployment. But investor concerns over lack of fiscal restraint are weighing on the real, adding to inflation that shows no sign of slowing to the 3% target.
What Bloomberg Economics Says
“We expect the BCB to convey a more hawkish message, but refrain from providing clear forward guidance. That vagueness would allow policymakers to retain flexibility to events like the US election and potential domestic spending cuts, which could influence the currency and inflation expectations.”
— Adriana Dupita, Brazil and Argentina economist
Click here for full report.
Brazil’s central bank will publish its decision on its website after 6:30 p.m. in Brasilia, with a statement from its board. Here’s what to look for:
Above Target
While policymakers are likely to emphasize that they remain data-dependent, they could signal preference for a more gradual tightening cycle. Campos Neto has said investors are exaggerating in their rate hike bets, which have moved closer to 75 basis points for the next few months.
“They could signal their intention to move ahead with smaller hikes than those priced in by the market,” said Rafaela Vitoria, an economist at investment firm Inter & Co.
Annual inflation accelerated to 4.47% in early October, just under the top of the central bank’s tolerance range. Food and energy costs have soared due to a severe drought, complicating policymakers’ efforts to keep inflation forecasts near its 3% target.
“We’ve seen higher meat prices, a weaker real, stronger growth and credit flows, all of which have an impact on short-term inflation,” said Caio Megale, chief economist at XP Investimentos. A worsening inflation outlook justifies faster rate hikes, he added.
The Brazilian real has lost more than 16% so far this year, becoming the worst performing major currency as investors question Lula’s pledges to shore up public accounts. A weaker currency makes imported goods more expensive and prompts inflation estimates to rise.
Fiscal Shock
Investors will be on the lookout for comments on public spending. Central bankers have been calling for a “positive fiscal shock” to soothe market concerns over Brazil’s debt outlook and tame inflation expectations.
Expenditures for some public programs are growing above the limit of 2.5% above inflation that’s established in Brazil’s fiscal rules. Finance Minister Fernando Haddad is meeting with Lula and cabinet members this week, and he’s expected to unveil spending cut measures in the coming days.
“A credible plan to cut spending could open the door for the bank to ease monetary policy,” said Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics.
Central bankers are also expected to comment on the impact of lower US interest rates while also pointing to a volatile international outlook.
--With assistance from Giovanna Serafim.
©2024 Bloomberg L.P.