BRASILIA Jan 15 Brazil will likely raise
interest rates for a seventh straight time on Wednesday, but a
recent spike in prices is keeping market players guessing
whether policymakers will slow or maintain its aggressive pace
of monetary tightening.
Twenty-nine out of 44 economists polled by Reuters last week
expect the central bank to raise its benchmark Selic interest
rate by 25 basis points to 10.25 percent. Fourteen see a
50-basis-point increase, and one expects rates to remain steady
at their current 10 percent.
The poll was taken before data showed that inflation had
surged in December to end the year at 5.91 percent, above the
central bank's own informal goal for the IPCA consumer price
index to remain below 5.84 percent last year.
Central bank chief Alexandre Tombini could face one of its
toughest decisions since he took over the top post in 2011.
Increasing the Selic by 50 basis points would send a strong
signal to markets that the bank is serious about keeping prices
in check and wants to bring inflation back to the center of the
official target range of 2.5 percent and 6.5 percent.
However, that bold rate hike could also jeopardize an
already weak economy in a year when President Dilma Rousseff is
widely expected to run for re-election.
"I'm keeping my call for an increase of 25 bps, but its a
complex scenario and I wouldn't be surprised if the bank goes
for 50 bps," said Jose Francisco Goncalves, chief economist with
Banco Fator in Sao Paulo.
"Despite the ongoing inflationary pressures, the bank will
probably opt to calibrate the rate-hiking cycle because the
economy is slowing."
Market traders are pricing a 66 percent chance that
policymakers will lift the Selic by 50 basis points on
Wednesday, according to Thomson Reuters data.
The bank has increased rates by 275 basis points since April
to tackle inflation that last year briefly pierced the ceiling
of the official target.
The central bank has signaled it may be ready to slow one of
world's most aggressive rake-hiking cycles by repeating the
position that recent increases in borrowing costs have a lagging
effect on inflation.
Still, Tombini has kept his options open, warning that local
currency volatility could limit the impact of past rate hikes.
The real weakened more than 13 percent against the U.S.
dollar last year.
A weaker real, which increases the prices of imports, and
more government spending have kept pressure on the central bank
to tame inflation, which economists expect to stay high, at 6
percent in 2014.
Even after the bold rate hikes, the central bank's own
forecasts also put inflation above the center of the target
until at least 2016.
Even if the bank opts for a larger rate hike on Wednesday,
many economists believe policymakers may only pause the central
bank's tightening cycle after its next meeting on Feb. 26.
"Independently of what they decide on Wednesday, I believe
the bank will hike rates at least one more time in February,"
said Luis Otavio Leal, chief economist with Banco ABC Brasil.
Leal changed his forecast for a rate hike of 50 basis points
from 25 basis points after the release of December's inflation
data on Friday.
Central bank director of economic policy, Carlos Hamilton
Araujo, hinted in late December that the bank may extend the
cycle of rate hikes, saying authorities "will keep an eye on the
battle against inflation."