Investors call for interest rate hike in Brazil

March 21, 2013

Two analyses published this week highlight how alarmed investors are about inflation in Brazil.

In the first, published on Wednesday following a poll on global stock markets, equity investors say an interest rate hike wouldn’t be a bad idea – a paradox, since stocks usually drop when borrowing costs rise. Are they keen to move to bonds? Not really; their argument is that an interest rate hike could assuage inflation fears after eight consecutive months of above-forecast price rises. A rate hike could also reduce concerns of economic mismanagement after several government attempts to intervene in key sectors such as banking and power generation.

The central bank signalled it could act later this year, but would rather wait because the recent inflation surge could be just temporary. Bond investors disagree, according to a separate analysis published today. In their view, inflation will remain above the 4.5 percent target mid-point through at least 2018, raising uncertainty about long-term investments needed to bridge the gap between Brazil’s booming demand and its clogged roads and ports.

They are not simply saying that: they’re actually placing bets on it, according to the so-called breakeven rate that measures the gap between yields for fixed-rate and inflation-linked debt.

To be sure, prices are not spiralling out of control in Brazil, with a rise of about 6.5 percent on an annual basis. Brazilians also don’t seem to care much about inflation, granting President Dilma Rousseff a record-high approval rating.

Consumer prices are not Brazil’s biggest problem right now — low investments and sluggish growth are more likely candidates. But sticky inflation deepens both of these problems, economists say.

Brazil also contrasts with the rest of Latin America. Tame prices allowed Mexico’s conservative central bank to cut rates earlier this month for the first time in nearly four years, for example. Without an interest rate increase, where are prices  going to stop when economic recovery (both in Brazil and abroad) finally picks up steam?

That is the question puzzling many in Sao Paulo financial markets.

Asher Levine and Guillermo Parra-Bernal contributed to this post

One comment

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Brasil does not need a rate hike. On the contrary, Brasil needs to lower rates further (gradually) to 5%. Most of the inflationary pressure is coming from the Services sector which is approx. 50% of the economy. There are also tertiary pass thru pressures from the (food) commodities sector (caused byQE U$ debasement). Interest rate hikes will not resolve this.

What Brasil needs is a tax reform – targeted piecemeal (easier) or comprehensive (difficult). This is already happening – electricity, attempted ICMS reduction & standardization, basic food staples & so on. This takes 3 to 6 months to feed thru & positively impact the system. The BRL should also be maintained at an exchange rate of 2.05 to the U$.

Investments in infrastructure can be spurred by financial incentives (higher, safer & more stable returns than other parts of the world) & eliminating redtape. Lower interest rates actually help this process as Capital is more efficiently allocated to the Productive vs. Financial/speculative sector. The government should also continue its policy of discouraging short term speculative ‘hot money’ by regualating the IOF tax as necessary, taxing high frequency trades & keeping a close eye on the financial shenanigans of the likes of GS etc.

These so called ‘investors’ who are pushing for interest rate hikes are bankster/hedge fund/speculator types engaged in the carry-trade & other forms of destructive financial speculation & Capital misallocation.

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