Brazil set for another steep rate hike despite recession signs: Reuters poll

By Silvio Cascione

BRASILIA (Reuters) – Brazil’s central bank will likely raise interest rates again next week, leaving no doubts about its willingness to fight inflation even as further tightening risks causing more damage to a struggling economy.

Forty-eight of the 49 economists surveyed since Tuesday expect policymakers to raise the benchmark Selic rate by 50 basis points to 13.75 percent on Wednesday. Morgan Stanley forecasts a smaller increase, to 13.50 percent.

Brazilian rates are the highest among the world’s 10 largest economies after successive increases since October. In the meantime, the economy shrank 0.2 percent in the first quarter and is expected to contract further in coming months.

The central bank has vowed to reduce inflation from above 8 percent currently to 4.5 percent by the end of 2016, at the center of the government’s target range.

The bank’s president Alexandre Tombini and other directors have reiterated that promise, changing the minds of economists who until recently believed policymakers could opt for a smaller hike.

“The authorities needed to be much more clear, for instance by explicitly mentioning the deterioration in the labor market, if they wanted to guide the market away from a 50-point move,” wrote Mario Mesquita, former central bank director and chief economist at Banco Brasil Plural.

The median forecast in the poll projected the Selic rate at 14.00 percent in 2015 and 11.75 percent at end-2016.

Inflation expectations have been stubbornly high because of recent rises in government-managed prices and lingering mistrust in the central bank, which slashed rates to record lows in 2011-12 even as inflation remained above target.

Nevertheless, a growing number of economists at leading financial institutions warned that further rate hikes are probably unnecessary.

Given the poor state of the economy, inflation expectations are set to drop as the effects of higher unemployment on prices become clearer. Forecasting models, economists say, are not reliable enough and may be overestimating inflation.

Instead of raising rates further, many suggest the bank could more effectively control expectations by communicating clearly that it has no intention to start bringing the Selic down in early 2016 as markets currently expect.

Carlos Kawall, chief economist at J. Safra, says the bank may tweak its post-meeting statement next week to send that message across.

“It can say its task is nearly done and now it will be time to ‘persevere’ by leaving rates at that level.”

(Reporting by Silvio Cascione; Editing by Nick Zieminski)