Brazil to hold rate as inflation collides with fragile recovery

Brazil is likely to keep its key interest rate at a record low for the third straight meeting, as policy makers are caught between a fragile economic recovery and faster-than-expected inflation.

The central bank board, led by President Alexandre Tombini, will maintain the Selic rate at 7.25 percent today, according to all 59 economists surveyed by Bloomberg. The decision follows news last week that Brazil’s gross domestic product grew less than economists estimated in the fourth quarter.

The world’s second-largest emerging market slowed for a second consecutive year in 2012 even after President Dilma Rousseff’s administration reduced taxes by $23 billion, stepped up government spending, weakened its currency and slashed borrowing costs to a record low. The measures that failed to ignite growth helped fuel inflation that jumped in January by the most in almost eight years.

“The government has created poor economic conditions,” former central bank director Alexandre Schwartsman said in a telephone interview from Sao Paulo. “Economic growth is far from what the government wants, and they are confronting a risk that inflation will be above the target range at some point this year.”

Consumer price increases in January exceeded economists’ expectations for the seventh straight month, jumping 0.86 per- cent and pushing the annual rate to 6.15 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Government measures “momentarily caused some disturbances for a few sectors, but caused a very good outlook for others,” Finance Minister Guido Mantega said in an interview last week. “The economy will grow more this year.” Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, have risen 53 basis points, or 0.53 percentage point, to 7.67 percent in 2013, as traders wager the central bank will need to increase rates as early as April to tame inflation.

Mantega on Feb. 15 said Brazil will do what it takes to keep inflation under con- trol, including raising borrowing costs necessary.

Policy maker concerns have shifted away from economic growth and toward anchoring inflation expectations as price increases approach the upper limit of the central bank’s target range, according to Gustavo Rangel, chief Latin America economist at ING Bank LV. “Inflation has become much more persistent than they thought,” Rangel said in a telephone interview from Bogota. Traders see an 80 percent chance policy makers will raise the Selic rate to 7.5 percent in their April meeting, Luciano Rostagno, chief strategist at Banco WestLB do Brasil, said in a phone interview from Sao Paulo.

Latin America’s biggest economy grew

if 0.9 percent in 2012, the slowest pace among major emerging markets, the national statistics agency said March 1. GDP increased 0.6 percent in the fourth quarter, less than the 0.8 percent median forecast in a Bloomberg survey of 37 economists.

Brazil’s consumption-propelled growth has also shown signs of fatigue. While household consumption jumped 3.1 percent last year, retail sales unexpectedly declined in December for the first time since May. Personal default rates have held near levels last seen in 2009, even as average loan rates have fallen to near record lows. “It was a very bad year,” Tony Volpon, head of emerging market research for the Americas at Nomoura Securities International, said in a telephone interview from New York. “The economy is not growing and credit markets are not booming.” The government forecasts that growth will rebound to at least 3 percent this year as the measures it took in 2011 and 2012 start to show effect, Mantega told reporters March 1. Investment, which rose in the fourth quarter for the first time after four consecutive drops, will continue to recover in 2013, he said.

Government officials including Mantega traveled last week to New York and London to drum up $235 billion in infrastructure investment. Rousseff, who has met one-on-one with 11 businessmen, from billionaire Eike Batista to Banco Santander SA Chairman Emilio Botin.