Brazil cenbank minutes show 75 bps June hike likely, but pause looms.

Nasdaq

Jamie McGeeve

 

Brazil's central bank expects to raise interest rates by another 75 basis points in June to keep inflation in check, meeting minutes showed on Tuesday, while suggesting it is unlikely to make an uninterrupted cycle of hikes to a 'neutral' level.

The minutes of the May 4-5 policy meeting, at which the bank's rate-setting committee known as Copom raised rates by 75 basis points to 3.50%, struck a slightly more dovish tone than the policy statement last week, analysts said.

Policymakers reaffirmed their view that another 75 basis point hike is the "appropriate" next step "unless inflation determinants change," given recent inflation pressures and short-term fiscal risks.

But they stressed that a "partial normalization" of policy will get inflation back down to target over the relevant horizon by the end of next year, adding that the public disclosure of that plan adds to the central bank's transparency and improves monetary policy efficiency.

"Additionally ... subsequent uninterrupted increases in the interest rate up to the level considered neutral imply projections considerably below the inflation target at the relevant horizon," the minutes said.

The central bank's 2022 inflation target is 3.50%. Copom last week said its baseline scenario currently points to 12-month inflation of 3.4% by the end of next year.

Financial markets had broadly interpreted the policy statement last week that Copom was not committed to "partial normalization" as a hawkish signal that rates could be raised more quickly to keep 2022 inflation expectations in check.

This helped lift the real to a four-month high near 5.20 per dollar BRBY.

But the minutes published on Tuesday indicate a slightly more cautious stance.

"Doves in hawk's clothing," said Jason Vieira, chief economist at Infinity Asset Management in Sao Paulo. "I don't see them raising rates above 5%."

The so-called neutral level of interest in Brazil, when the economy runs at full employment and potential growth without fueling inflation, is thought to be around 6.0-6.5%.

The minutes showed policymakers believe slack in the economy is returning to 2019 levels, although the recovery remains uneven. Production of goods is recovering strongly, but the dominant services sector continues to struggle, they said.

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