Brazil’s central bank will likely hold interest rates at a record low on Wednesday despite a plunge in the currency, a Reuters poll showed, but may strike a more hawkish tone in a first step toward narrowing a policy gap with its peers.
A big domestic unknown this year is the outcome of the presidential elections, due to start on Oct 7. It is the most hard-to-predict national vote in decades, set against a backdrop of double-digit unemployment, underwhelming economic growth and relatively tame inflation.
The single dissenter, Societe Generale, expected a 25 basis-point hike to 6.75 percent.
“We suspect authorities will prefer to alter the guidance from neutral to hawkish, instead of opting for an outright rate hike at this meeting,” ING economist Gustavo Rangel wrote in a report to clients.
“Given the low inflation (rate) and still substantial ammunition to intervene in the FX market, if necessary, authorities can wait until after the elections, when a better assessment of the political and fiscal outlooks will be possible.”
The concerns of investors and currency traders that the next president will refrain from slashing government spending to rein in ballooning public debt have magnified Brazil’s participation in a global emerging-market selloff, hammering the real to near all-time lows.
Heightened uncertainty about the shaky economy, particularly after a nationwide truckers’ strike in the final weeks of May brought it to a near-standstill, have driven the central bank to hold off from offering any forward guidance on interest rates.
Now, with the currency in a tailspin, the central bank may be forced to take a more hawkish tone in its policy statement, several economists said, potentially laying out conditions that would warrant a hike going forward.
A 21-percent plunge in the real this year, which has put it among the world’s worst-performing currencies, will likely bump up import prices, which in turn will boost inflation, currently hovering near 4.3 percent.
Brazil’s central bank is targeting a 4.5 percent inflation rate in 2018 and 4.25 percent in 2019, plus or minus 1.5 percentage points, so there is no reason to move just yet. Double-digit unemployment is also likely to curb any pass-through.
The bank has repeatedly said that currency moves will only drive monetary policy if they influence wider consumer prices or expectations for future inflation.
That has seemingly convinced economists that the bank can afford to stand pat for a while yet. Only three out of 34 who replied to an extra question expected policymakers to hike rates this year, with most predicting it will happen some time in the first half of 2019.
Of the 25 who had replied to the same question in last month’s poll, 12 maintained their forecasts, six pulled the next rate rise closer and seven pushed it back, suggesting it is not clear how the battered real will shape the bank’s thinking.
Economists at Bradesco, the nation’s No. 2 private lender, expect the central bank’s inflation forecasts, which assume a constant foreign exchange rate, to be 4.7 percent in 2018 and 4.4 in 2019, surpassing the mid-point of its goal in both years.
But that is unlikely on its own to trigger a hike, as “it’s not clear whether the current level for the currency will last long,” they wrote in a report. “It seems to us that the optimal strategy for the central bank is to wait for more clarity on the fiscal front.”
The latest Reuters foreign exchange poll suggested the Brazilian real is likely to recover in coming months after electoral jitters die down, though forecasters grew much more tentative due to rampant volatility.
Far-right candidate Jair Bolsonaro, who was stabbed last week and is unlikely to campaign any time soon, has tapped a University of Chicago-trained banker as his main economic advisor.
He has led voter intention polls, but is tied with his main rivals in a second-round vote.
Leftists Ciro Gomes and Fernando Haddad seem most likely to reach the second round, after jailed former President Luiz Inácio Lula da Silva, who had led polls even after being arrested for corruption, dropped out of the race.
Source: Nasdaq.com