MercoPress. South Atlantic News Agency

Brazil central bank leaves basic rate unchanged, but hike anticipated for January

It was President Henrique Meirelles last Copom meeting

Brazilian policy makers kept their benchmark overnight rate unchanged on Wednesday after curbs on credit allowed central bank President Henrique Meirelles to leave anticipated rate increases for his successor.

Policy makers including Alexandre Tombini, who is slated to succeed Meirelles next month, voted unanimously to keep the Selic rate unchanged at 10.75%. The eight-member board, in a statement, said they faced a “less favourable scenario” than in their last meeting, though they needed “more time” to gauge the economic impact of new reserve requirements on banks to curb the growth of credit.

Traders are betting the Brazilian central bank will raise borrowing costs by a half-point at its next meeting in January. About 100 economists in a central bank survey published Dec. 3 said they expect a half-point increase in January.

The next Monetary Committee, Copom, is scheduled for January 18/19.

The Central bank release said that taking in account the current macro-economic situation and inflation prospects, Copom unanimously decided to keep the Selic rate at 10.75%. Given a less favourable scenario than that of the last meeting but taking into account that because of credit and liquidity conditions, --the Central bank recently introduced ‘macro-prudential’ measures--, the prevailing feeling among members of the Committee was that additional time was needed to better gauge the effects of those initiatives on the monetary conditions. To that respect, the Committee agreed it was not the right time to re-evaluate in this meeting the monetary policy strategy and will follow closely the evolution of the macroeconomic scenario in the next meeting and then define the following steps regarding its monetary policy strategy’.

The world’s eighth-largest economy will grow 7.54% this year, its fastest pace in more than two decades, according to the most recent central bank survey. GDP likely expanded 0.4% in the third quarter from the previous three months.

Retail sales grew 11.8% in the year through September, the fastest pace since March. Unemployment fell to a record low 6.1% in October. Domestic demand, buoyed by consumer lending growing at a 20% annual pace, is fuelling an acceleration of inflation.

Consumer prices in Brazil, as measured by the benchmark IPCA index, rose 5.63% percent in November from a year earlier and 0.83% from October, the biggest monthly increase since April 2005.

Inflation expectations for 2011 have accelerated to 5.2%, from 4.8% in August and 4.5% in March, according to the central bank survey.

Tombini, who has been on the bank’s board since 2005, won Senate committee approval to be the bank’s next president on Dec. 7. At his confirmation hearing he echoed remarks made by Meirelles that higher reserve levels would have an impact on the economy, even though they aren’t a substitute for traditional monetary policy tools.

President-elect Dilma Rousseff has pledged to contain spending next year in a bid to reduce Brazil’s real interest rate, the highest in the Group of 20 nations.

Higher borrowing costs are also putting pressure on the Real, as investors buy higher-yielding currencies with funds borrowed at lower rates. The Real, which is the best performer among 16 major currencies tracked by Bloomberg over the past month, weakened 0.5% to 1.6903 per U.S. dollar Tuesday.