Meirelles Seeks to Prevent Brazil 'Overheating'
Bloomberg, April 13, 2010
Brazilian central bank President Henrique Meirelles said his challenge is to prevent Latin America’s biggest economy from “overheating” as increasing domestic demand fuels the best growth outlook he’s ever seen. Yields on interest rate future contracts rose.
Meirelles, in an interview two weeks before he’s forecast to raise borrowing costs for the first time in 19 months, said it was “feasible” to bring inflation back to the government’s 4.5 percent target this year. He said policy makers won’t hesitate to raise the benchmark rate to rein in consumer prices.
“The challenge now is not to allow this economy to overheat,” Meirelles, 64, said in the interview yesterday at the bank’s Rio de Janeiro office. “Brazil as a whole is doing extremely well, we have an economy that is getting out of this crisis stronger than before, domestic demand is very strong and we have a domestic market today which is broader and deeper than it ever was before.”
Meirelles ended a bid to seek elected office April 1 and said he would stay in his post until President Luiz Inacio Lula da Silva, 64, completes his second term in December. Interest rate futures contracts indicate traders expect the central bank to lift the benchmark rate by at least half a percentage point to 9.25 percent at its April 27-28 policy meeting to curb inflation that climbed to a 10-month high of 5.17 percent in March.
Ten-Month High
The yield on the interest rate future contract due January 2011, the most traded on Sao Paulo’s BM&F exchange, jumped 7 basis points to a 10-month intraday high of 10.59 percent before paring gains and closing at 10.57 percent. The real gained 0.21 percent to 1.7495 per dollar.
Meirelles comments “reinforce that the beginning of a tightening cycle will be steeper than initially expected,” Diego Donadio, senior economist with BNP Paribas in Sao Paulo, said in a phone interview. “We expect a 75 basis point increase in April because we cannot ignore the clear signs economic activity is moving really fast.”
Meirelles’ decision to leave the benchmark Selic rate unchanged at a record low 8.75 percent last month surprised 30 of 57 analysts in a Bloomberg survey who were predicting a 50 basis point increase.
Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo and a former central bank board member under Meirelles, said that he had “difficulties” understanding the decision given that policy makers in their minutes said a “tightening cycle is an imperative.”
‘No Hesitation’
“There is no hesitation” to raise rates, Meirelles said, adding that the board’s split vote reflected a “divided” market about the timing of the increase. He said it was “natural” for board members to “have some disagreement about the strategy and the timing” of policy action even while agreeing in their overall assessment of the economy.
Inflation will quicken to 5.29 percent by year-end, according to the median estimate in a central bank survey of about 100 economists published yesterday.
It was the 12th straight week economists raised their 2010 inflation outlook. The economic growth forecast for this year rose for the fourth straight week to 5.6 percent in the survey.
Inflation will slow to 4.4 percent in 2011, should policy makers raise the benchmark interest rate to 11.25 percent by December, according to estimates by the central bank in its March quarterly report.
Retail Report
Retail sales jumped 10.4 percent in January from the same year ago period, the biggest gain in 18 months. Sales likely increased 10.5 percent in February, according to the median estimate in a Bloomberg survey of 31 analysts. Brazil’s statistics agency publishes its February retail report tomorrow.
“Monetary policy actions, the exit of the anti-crisis strategies plus other shocks can bring inflation to target in the year 2010,” Meirelles said.
Meirelles, Brazil’s longest serving central bank president, gave up in 2002 a $2.6 million-a-year job as head of global banking at FleetBoston Corp to run for a seat in congress as a member of the Brazilian Social Democracy Party, the main opposition party to Lula’s government.
His appointment to head the central bank signaled Lula would abandon the positions he espoused as a labor activist and discard earlier threats to default on Brazil’s then $300 billion of public debt. During his first policy meeting in 2003, Meirelles surprised investors by raising the benchmark rate to 25.5 percent.
Credit Default Swaps
Meirelles said yesterday he hasn’t decided whether to resume his banking career or stay in government when his term ends. Investors have speculated that Lula’s chosen heir, Dilma Rousseff, may invite him to serve as finance minister should she win October’s presidential election.
“When I end my term I will think of my options,” Meirelles said.
Brazil, which defaulted on its foreign debt twice in the past 25 years, received its first investment grade rating from Standard & Poor’s in 2008.
The cost to protect Brazilian debt from default is lower than in countries with a higher debt rating. Five-year credit- default swaps on the debt of Brazil, rated BBB- by Standard & Poor’s, closed at 121 basis points yesterday, according to prices from CMA DataVision in New York.
Rising Markets
By comparison, credit-default swaps on the debt of Spain, rated eight levels higher at AA+, closed at 125 basis points while credit-default swaps on the debt of Ireland, rated AA, last traded at 148 basis points. A basis point is 0.01 percentage point.
Credit-default swaps pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness, and a drop shows improvement.
The benchmark Bovespa stock index has soared more than 1,100 percent in dollar terms since Lula took office in January 2003. Over the same period, the Brazilian real has doubled against the dollar.
This year the real has fallen 0.6 percent after strengthening 33 percent last year, the best performer among 16 major currencies tracked by Bloomberg. The Bovespa is up 3 percent after climbing 83 percent in 2009.
Meirelles, who in November warned that investors were too euphoric, said “markets are more cautious at this point of time,” adding the correction in prices has been “healthy.”