Investors call for interest rate hike in Brazil
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