Has Brazil’s central bank blinked?

January 19, 2016

International Monetary Fund (IMF) Managing Director Christine Lagarde (L) shakes hands with Brazilian Central bank president Alexandre Tombini during a seminar on inflation targets in Rio de Janeiro May 22, 2015. REUTERS/Sergio Moraes  - RTX1E44R

IMF forecasts rarely tell us something we don’t already know about the world economy. The dramatic revision of the Fund’s estimates for Brazil’s economic growth in 2016 and 2017, however brutal, only reflected the sheer pessimism rooted for months among private economists captured in the latest Reuters poll about prospects for the next Olympic host.

This time, though, the IMF World Economic Outlook could have serious policy implications for Brazil. In an unusual statement, central bank governor Alexandre Tombini said the forecasts will be taken into account as policymakers meet today and tomorrow to weigh on a potential interest rate hike.

To most economists in Brazil and abroad, the statement was a game-changer for a bank still struggling to recover its credibility. Policymakers are in a quandary, facing the worst recession among G20 economies but also one of the highest inflation rates, above 10 percent.

Until yesterday, the bank had promised to do whatever was necessary to make sure it would not miss its inflation target by a second straight year in 2016 – a sign it would resume raising interest rates this week, probably by 50 basis points, to an eye-watering 14.75 percent.

A few economists criticized the bank harshly for what they saw as a disaster in the making. Interest rates are already high enough for a economy bordering depression, and further hikes could also make a budget crisis even worse. Political pressure is also mounting, with government officials expressing in private their concern about prospects of higher interest rates.

Now, the bank is getting heat from the other side.

Economists arguing for another rate increase say the bank is raising further questions about its independence with yet another last-minute change of mind.

“The bank has fueled uncertainty,” said Jankiel Santos, chief Brazil economist at bank Haitong, in Sao Paulo. “This was not a good signal, if you consider rate decisions are to coordinate expectations and recent communication had been reiterating the bank would do anything necessary.”

Economists are still scrambling to revise their calls for its Jan 20 meeting. A Reuters poll last week had a solid majority, 48 of 59, forecasting a 50-point hike. Some, such as Gradual’s Andre Perfeito, are holding on to that call.

Octavio de Barros, chief economist at Bradesco, not only reiterated his forecast of stable rates on Wednesday, but also sees cuts to the Selic rate, which is “certainly to end the year below 14 percent.”

And Mario Mesquita, chief economist at Brasil Plural and former central bank director, now expects a smaller increase of 25 basis points: “this time the Copom signaled before surprising.”

— additional reporting by Paula Laier

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