Brazil Rate Hikes Not Done Yet

Apr 3 2014, 8:27am CDT | by

Brazil raised its overnight Selic interest rate to 11% Wednesday as expected, but Nomura Securities in New York thinks the Central Bank is not done hiking rates just yet.

Tony Volpon, Head of Emerging Markets Americans at Nomura, said interest rates will probably go to 11.25% in May, and then the Central Bank will finally take a breather.

The post-meeting communiqué brought language changes that strongly signal that the current tightening cycle is near its end, Volpon wrote in a note to clients Thursday morning.

Different from the February statement, now monetary authorities are saying that it will “monitor the evolution of the macroeconomic scenario until our next meeting, to then define the next steps our monetary policy strategy.” In previous instances, such language was used to announce the strong intention to end, begin, or change the pace in the current strategy. In the current context, it signals the desire to end the cycle at the next meeting, with or without a further 25 basis point hike to 11.25%.

The decision to signal an end of the cycle at the May 28 meeting is, and is not, surprising. It is surprising because it comes right after a hawkish inflation report that saw large increases in its inflation forecast with no meaningful downgrading in the economic outlook. On the other hand, the weak state of the economy argues for a pause in the interest rate tightening cycle, despite near term inflationary challenges due to drought-related food price shocks, and Brasilia’s unwillingness to raise regulated prices like electricity in an election year.

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

–The iShares MSCI Brazil ETF finally outperformed the MSCI Emerging Markets Index in late March despite higher interest rates and creeping inflation.

The more dovish-than-expected message will drive the bulls buying shorter term interest rates futures in Brazil and bonds. But the longer end should not benefit that much, says Marcelo Salomon, an economist with Barclays in New York.

“The real question for monetary policy remains, and is only likely to be dealt with after the elections — namely, how to deal with repressed regulated prices in an environment of weak economic activit,” Salomon says.

On Thursday, the hotly traded iShares MSCI Brazil (EWZ) exchange traded fund was off by 1.5% in the pre-market hours.


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

15 Million T-Mobile User Data Stolen on Experian Servers
15 Million T-Mobile User Data Stolen on Experian Servers
Credit monitoring firm Experian has been hacked. Affected are about 15 million T-Mobile Customers. T-Mobile CEO John Legere responds.
Narendra Modi Courts Silicon Valley Companies, Making India the New China
Narendra Modi Courts Silicon Valley Companies, Making India the New China
India’s prime minister, Narendra Modi, is courting the top technology companies in Silicon Valley. On Saturday, Mr. Modi visited Tesla and met Elon Musk. He also had dinner with Microsoft CEO Satya Nadella and Google...
How Can Solar Panels Be Made More Efficient?
How Can Solar Panels Be Made More Efficient?
The unique Kirigami technique can help capture more sunlight as it enables solar panel cells to track the sun throughout the day.
Amazon Christmas 2015 Rumor - Smallest Tablet Ever?
Amazon Christmas 2015 Rumor - Smallest Tablet Ever?
With Labor Day having come and gone, Christmas is starting to roll out into stores and onto the internet - and everyone is trying to get a head start on the competition. Amazon is one of the first to have rumors come...