By Alonso Soto
BRASILIA Feb 18 Traders of Brazilian interest
rate futures changed bets and expect authorities to opt for a
smaller rate hike after central bank chief Alexandre Tombini
said policymakers have been doing their "homework" in fighting
Market traders interpreted Tombini's comments to mean the
bank may not need to keep up the aggressive pace of monetary
tightening to slow inflation.
"We are not new in this process, we have been doing our
homework to fight inflation and to a large extent we have been
successful," said Tombini, referring to policies used to prepare
the country for tighter monetary policy in developed economies.
Tombini also stressed that the central bank will keep a
close eye on inflation, saying that there are many tools to
battle price increases. However, he hinted interest rate will
remain the preferred instrument to control prices.
Under Tombini the central bank has raised interest rates by
325 basis points since April to 10.50 percent, quickly lifting
borrowing costs from record lows to battle a surge in prices.
Until recently, market traders expected the bank to opt for
another 50-basis-point rate increase at its next meeting on Feb
26. However, the probability of a 25-basis-point rate hike
implied in the rate futures curve increased to 61 percent after
Tombini's comments, according to Thomson Reuters data
"Many interpreted his comments to mean the bank will rely on
other tools to battle inflation instead of rate hikes, but I
don't agree with that view," said Andre Perfeito, chief
economist with Gradual Investimentos in Sao Paulo. "For the
central bank to control long-term inflation expectations it
needs to raise rates by 50 basis points."
Tombini said that the monetary tightening has had some
impact on inflation, but repeated that the policy operates with
some lags and that more effects would be felt later.
Inflation has eased to the lowest in around a year, but
remains at the upper end of the official target range between
2.5 percent and 6.5 percent. Inflation likely rose 5.63 percent
in the 12-month period through mid-February, according to a
Reuters poll of economists.
Tombini said he did not expect Brazil to have fallen into
recession in late 2013 or that it would do so in 2014 despite
recent data indicating that the economy may have contracted for
two straight quarters, the definition of a technical recession.
Tombini acknowledged that the economy may have grown less
than the central bank's 2.3 percent forecast for 2013, but said
conditions are improving, with more investment flowing into
infrastructure projects in coming quarters.