Brazil Seeks to Curb Prices by Raising Rate More Than Forecast
Brazil's central bank Governor Henrique Meirelles, who yesterday lifted interest rates for the first time in three years, is betting he can contain inflation by tightening monetary policy more aggressively than economists anticipated.
Policy makers raised the overnight rate by half a percentage point to 11.75 percent from a record-low 11.25 percent, surprising 34 of 46 economists surveyed by Bloomberg. Ten analysts correctly predicted the increase and two expected the rate to remain unchanged.
The increase seeks to dampen consumer spending as the near doubling in bank lending in the past three years fuels record purchases of cars, fridges and other home appliances. The bank said the move took care of a “significant part'' of the tightening needed to contain inflationary expectations.
“The central bank has chosen a more aggressive approach,'' said Mauricio Oreng, senior economist at Itau Corretora, the brokerage unit of Banco Itau Holding Financeira SA, Brazil's second-biggest bank by assets. He expects at least two more similar rate increases this year.
Latin America's biggest economy grew 6.2 percent in the last quarter of 2007, more than twice the pace of the last decade. The increase in consumer demand and a surge in food prices have pushed annual inflation from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month.
Above Target
Analysts covering Brazil forecast 2008 inflation of 4.66 percent, according to an April 11 central bank survey. Bankers aim for annual consumer prices of 4.5 percent with a leeway of plus or minus 2 percentage points.
“The decision to immediately carry out a significant part of the movement in the basic interest rate will contribute to an opportune lowering of the risk that is being shaped for the inflationary scene,'' the bank said in a statement.
Policy makers will raise the so-called Selic target rate to 12.75 percent by year-end, according to an April 11 central bank survey.
“When the central bank says it has carried out a significant part of the increase, I expect at least a third of the monetary tightening has already been carried out,'' said Sergio Goldenstein, former head of open-market operations at the central bank and now chief economist at Rio de Janeiro- based BNY Mellon ARX, which manages about $5 billion in assets.
The central bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999 same day payday loans.
Credit Demand
Bank lending may reach a record 40 percent of gross domestic product this year from 34.9 percent in February, Altamir Lopes, head of the central bank's economic research department, said last month.
The number of credit cards in Brazil has more than doubled since 2003 to 92.9 million, according to a survey by Itau.
Credit increased after the government passed legislation reducing default risk, allowing banks to deduct repayments directly from an individual's paycheck. Low interest rates and rising employment also increased demand for loans.
The surge in credit and consumption raises concerns that investment in production won't be enough to meet demand, Mario Mesquita, the central bank's economic policy director, said on March 27.
Brazilian car registrations surged 31 percent in the first quarter. Companies such as Usinas Siderurgicas de Minas Gerais SA, the second largest Brazilian steelmaker, have been cutting down on exports to meet local demand from automakers.
Home appliance and furniture sales climbed 17.8 percent in February from the year-ago month, according to figures from the national statistics agency.
Shoppers
“The situation is easier now,'' said Roseli Ribeiro Muniz Goes, 40 a cleaning lady in Sao Paulo. “We can buy things and pay in installments that fit our budget.''
Roseli this year purchased a television for 65 reais ($39) a month in 12 monthly installments. Last year, she used credit to buy a new iron, a DVD player and a sound system.
Higher rates may prompt some consumers, such as Leonardo Imnperiano da Silva, to pare spending.
“I will have to pay more interest if the central bank raises interest rates,'' said Silva, 33, a supervisor at a homeless shelter, who this year bought a 21-inch television for 684 reais in six installments.
Brazilian President Luiz Inacio Lula da Silva and his predecessor, Fernando Henrique Cardoso, bolstered investor confidence in the country by underscoring the government's commitment to battling inflation.
Annual inflation, as measured by the benchmark IPCA index, reached 2,477 percent in 1993. The index, which averaged 400 percent a year between 1980 and 2007, fell below 10 percent for the first time in 1996.
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