MercoPress. South Atlantic News Agency

“Inflation expectations” gear Brazilian central bank rates policy

Central bank president Henrique Meirelles

Brazilian central bank President Henrique Meirelles said analysts were surprised by a smaller- than-expected interest rate increase in July because they misunderstand signals sent by policy makers beforehand.

Policy makers on July 21 raised the Selic basic rate by a half- point to 10.75% surprising most analysts surveyed by Bloomberg who expected a third straight 0.75 percentage point increase.

Analysts failed to anticipate the decision because they based their forecast on the central bank’s June 30 inflation report that raised growth and inflation estimates, Meirelles said.

The head of the central bank added that he anticipated that on July 15 he would weigh all data released ahead of the July 20-21 meeting to make a decision on interest rates. The comment was interpreted by traders as a signal that the central bank would reduce the pace of rate increases.

“It was a misunderstanding of many analysts,” Meirelles said Friday in an event in Sao Paulo. The rate decision “must be based on inflation, inflation expectations and second and most importantly on measured inflation.”

Consumer prices, which were unchanged in June, rose 0.01% in July, according to the national statistic agency. Meirelles said the bank seeks to manage inflation expectations and not interest rate expectations.

Traders expect the bank to keep rates unchanged at its August 31-September first meeting, according to a survey based on interest rate futures.

“Ideally the world and Brazil’s economy will return to a level of stability that it becomes totally predictable” Meirelles said.