Brazil Economy & Investment
Brazil readies first rate hike in 2 years
Policymakers say rate hike necessary to curb demand
* Lower-than-expected Feb unemployment underscores rebound
* Expectations grow for rate change at April 28 meeting
(Adds currency rate changes, quotes)
By Elzio Barreto and Guillermo Parra-Bernal
SAO PAULO, March 25 (Reuters) - Brazil's central bank policy-makers said on Thursday they are ready to raise rates next month to curb inflation pressure as jobs data highlighted the strength of the country's economic rebound.
The central bank's board is in agreement on the need to cool a rapid rebound in consumer demand in Latin America's biggest economy, according to minutes from the bank's monetary policy committee meeting held last week.
Brazil would be the region's first major economy to hike borrowing costs in the wake of the global financial crisis should the bank raise its Selic lending rate when its next policy meeting ends on April 28.
"There was consensus among committee members on the need to implement an adjustment to the base interest rate," the minutes said. "Given the signs of robust domestic demand, causing the reduction of the output gap... and recent inflation expectations, the risks to a benign inflation scenario increased."
The central bank committee, known as Copom, last week voted to keep its so-called Selic rate unchanged at a record low 8.75 percent for a fifth straight meeting, despite rising inflation expectations.
A majority of the 8-strong Copom decided to wait for further evidence of inflation pressure before raising borrowing costs. Three voted for a 50-basis point increase and the minutes left the door open for bigger hikes down the line, some analysts said.
"The majority of Copom members...thought it more prudent to watch the evolution of the macroeconomic scenario until the next committee meeting, so as to then start the adjustment in the base rate," the minutes said.
BANK TURNS HAWKISH
Job figures released on Thursday reinforced the view the economy is on a solid footing. Unemployment in Brazil rose in February, but by less than expected as the recovery prompted more people to look for work. See [ID:nN25221890].
"They clearly turned more hawkish than before, and I think they clearly paved the way for a hike on April 28th," said Marcelo Carvalho, chief Brazil economist for Morgan Stanley in Sao Paulo. "There are several changes in the wording that indicate much stronger language regarding demand pressures and inflation concerns."
The committee minutes pushed yields on short-term Brazilian interest rates higher <0#DIJ:>, raising expectations that borrowing costs will increase next month for the first time since September 2008.
Inflation expectations have been rising rapidly in Brazil during recent weeks. Analysts bet the benchmark IPCA consumer price index could reach 5.1 percent at the end of 2010, according to the latest weekly central bank survey.
The government has an inflation target of 4.5 percent, plus or minus 2 percentage points.
Analysts in the central bank survey also see 5.5 percent growth for the economy in 2010, and the most recent data reinforced the prospect of solid growth this year.
The central bank also said the pace of recovery in the economy has further reduced its output gap, increasing inflation pressures in the country.
The yield on the Jan. 2011 DIJF1 interest rate futures contract jumped 5 basis points to 10.37 percent on Thursday after the minutes from its 10.32 percent close the previous day.
CURRENCY IMPACT
Expectations of higher borrowing costs in Brazil come as the central bank readies a series of changes in foreign exchange rules that may slow currency inflows.
The measures aimed at simplifying the foreign exchange market could help offset the impact of more dollars entering the country from investors hungry for higher yields.
Among the measures announced on Wednesday, companies will not require prior authorizations from the central bank to move money in and out of Brazil. Also, companies that raise money through the sale of shares outside Brazil known as depositary receipts will be allowed to keep those proceeds abroad, Central Bank President Henrique Meirelles told a news conference in Brasilia on Wednesday. See [IDnN24185455]
RBS Securities said in a note that while the policy changes do not target a specific level of foreign exchange, they would be slightly negative for the Brazilian currency because they facilitate outflows.
"There is an implicit bias in stemming the pace of foreign exchange appreciation."
Brazil's currency, the real (BRBY), rallied about 34 percent in 2009 -- prompting the government to adopt a tax on capital inflows into fixed-income and stock markets to limit the currency's appreciation. The real is down 3.5 percent so far in 2010.
Source: reuters.com