Brazil's central bank kept its options open for when interest rates rise to cool inflation running at more than five years after leaving its benchmark rate unchanged yesterday at the last meeting chaired by the bank president, Henrique Meirelles.
Policy-makers Tombini Alexandre, who is scheduled to hit next month Meirelles, voted unanimously to keep the Selic rate unchanged at 10.75 percent. The decision matched the forecast of 48 of 51 analysts surveyed by us. Three economists forecast an increase of at least a quarter point.
The eight-member board said in a statement, said it faced a "less favorable scenario" that at its last meeting, although they needed "more time" to assess the economic impact of the new reserve requirements on banks to curb credit growth.
"There is no smoking gun here that are going to hike rates in January," said Marcelo Salomon, chief economist for Brazil at Barclays Capital, in a telephone interview from New York. "The markets will re-evaluate the likelihood that they will walk and in January."
Traders are betting that the bank will raise borrowing costs by a half point at its next meeting in January, according to estimates based on future interest rates. About 100 economists in a central bank survey published Dec. 3, said he expected a half point increase in January.
The bank of 03 December, the announcement of an increase in capital and reserve requirements on bank deposits has introduced uncertainty about the timing and magnitude of rate increases, said Gray Newman, chief Latin America economist at Morgan Stanley .
'Late Again'
"Today, the language does not clarify that at all," Newman said in a telephone interview from New York. "It leaves the door open for them, could be postponed once again."
the world's eighth largest economy will grow 7.54 percent this year, its fastest pace in more than two decades, according to the latest survey of the central bank. The gross domestic product probably expanded 0.4 percent in the third quarter of the last three months, according to the median estimate of 35 analysts surveyed by us before today's GDP report.
Retail sales rose 11.8 percent in the year to September, the fastest pace since March. Unemployment fell to a record low of 6.1 percent in October.
Domestic demand, driven by consumer loans growing at a rate of 20 percent per year, is driving an acceleration of inflation.
Inflation Surge
Consumer prices, measured by the benchmark IPCA index, rose 5.63 percent in November from a year earlier and 0.83 percent from October, the biggest monthly increase since April 2005.
Inflation expectations for 2011 have been accelerated to 5.2 percent from 4.8 percent in August and 4.5 percent in March, according to central bank survey.
"The inflation outlook is deteriorating and calls for a policy response," said Marcelo Carvalho, chief of research in Latin America at Banco BNP Paribas Brasil in Sao Paulo. Carvalho Tombini expected to raise the Selic rate by at least 50 basis points next month.
Tombini, who has been aboard the bank since 2005, won the approval of the Senate committee to be the next president of the bank on December 7. In his confirmation hearing echoed the comments made by Meirelles, that high levels of reserves have an impact on the economy, although they are not a substitute for the traditional tools of monetary policy.
Dilma Rousseff President-elect has pledged to curb spending next year in an attempt to reduce real interest rates in Brazil, the highest in the Group of 20.
Higher borrowing costs are also putting pressure on the real, as investors buy higher-yielding currencies with borrowed funds at lower rates. The real, which is the best performer among 16 major currencies tracked by us in the last month, weakened 0.5 percent to 1.6903 per U.S. dollar yesterday.
"Despite the statement raises questions about when to resume rate increases, policy makers should lower inflation expectations and a strong fiscal adjustment to avoid raising rates," said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. "won 't enough time for that before the January meeting."
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