- Consumer prices have gained traction, rising four consecutive months;
- Brazil’s economic recovery is still very fragile and exposed to potential setbacks.
Brazil‘s central bank will leave its key interest rate unchanged at a record low of 2.0% next week as it waits to see how a nascent economic recovery evolves, although most economists polled by Reuters now see rate risks skewed to the upside.
The bank’s rate-setting committee, known as Copom, is set to give equal weight at its policy meeting on Wednesday to evidence of an uptrend in consumer prices and signs pointing to a pick-up in retail sales, industrial production and other sectors.
Marred by the second highest death toll in the world after the United States, Latin America‘s No. 1 economy is emerging from the worst of this year’s coronavirus wave with help from the bank’s ultra-dovish stance and a huge government spending drive.
All 31 respondents in the Oct. 12-15 survey predicted the Copom would keep the key Selic rate at 2.0% for a second month after an easing campaign that started last year even before the COVID-19 shock.
“Accelerating inflation and fiscal concerns will not allow the bank to cut the Selic rate further,” said Pedro Tuesta, senior Latam economist at Continuum Economics. “At the same time, it is committed to not withdrawing stimulus soon.”
“While it might not be able to keep the current stimulus until the end of 2021 as it has suggested in its forward guidance, it will not hike in the coming months,” he added, referring to recent comments by the bank’s head.
Consumer prices have gained traction, rising four consecutive months to an annual clip of 3.14% since slowing to the weakest pace in more than two decades during May amid the economic freeze from the virus’ impact.
However, this is still within the bank’s target of 4%, with a margin of tolerance of 1.5 points higher or lower. Meanwhile, Brazil’s economic recovery is still very fragile and exposed to potential setbacks.
As in September’s survey, the Selic was forecast to rise to 2.25% in the third quarter of next year, then to 3.0% in the final three months of 2021 and climbing by 25 basis points increments thereafter.
In response to a separate question, 15 of 18 economists saw rate risks in the next 12 months tilted to the upside, while three viewed them as neutral, and none skewed to the downside.
This represented a significant change from the last survey, where a majority of economists had inclined toward a neutral bias. It came in line with a deterioration in fiscal prospects following an unexpected official move to expand welfare plans.
Brazilian markets took a hit due to uncertainty on how President Jair Bolsonaro‘s government would fund its new program ‘Renda Cidada’ without breaking the ‘spending ceiling’ rule that limits public spending growth to the rate of inflation.
Brazil’s central bank president, Roberto Campos Neto, has said any trigger for higher interest rates would be linked to inflation, not a breach in the government’s spending cap rule. But some economists remain unconvinced.
“The main risk is the fiscal outlook and if President Bolsonaro goes against the existing fiscal rules to fund his new social program, the bank may be forced to raise rates,” said Natalie Rivett, senior EM analyst at Informa Global Markets.