Brazil Is Set to Raise Interest Rates Hours After Fed Cuts Them

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(Bloomberg) -- Brazil’s central bank will likely raise interest rates for the first time since 2022 as a heated economy and above-target inflation forecasts make it an outlier in a global easing push emboldened by the Federal Reserve.

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Policymakers led by Roberto Campos Neto will lift the benchmark Selic by a quarter-point to 10.75% late on Wednesday, according to 31 of 35 economists in a Bloomberg survey. Two expect an even bolder increase of half a percentage point while the remaining two forecast no change. Most traders bet on a hike of 25 basis points, with digital options at the local stock market pricing in a 15% chance of a 50 basis-point rise.

Latin America’s largest economy stands out from peers with activity resisting to high borrowing costs. President Luiz Inacio Lula da Silva’s increased public spending is turbo-charging family income that’s already been supported by low unemployment. A resilient economy along with questions about the government’s commitment to fiscal responsibility are feeding into inflation forecasts which are above the 3% target through 2027.

What Bloomberg Economics Says

“Brazil’s central bank is widely expected to embark on a hiking cycle on Wednesday, but there’s plenty of questions that the post-meeting communication could clarify. We expect the BCB to strike a delicate balance as it aims for a hawkish tone to curb inflation expectations, flexibility to adjust the rate path on new data and to push back on market pricing for aggressive hikes. Achieving all three is a tall task.”

— Adriana Dupita, Brazil and Argentina economist

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Brazil’s decision will come hours after the Fed is expected to lower borrowing costs by at least a quarter-point. Across Latin America, several monetary authorities continue to ease policy, with the latest rate cuts coming from Peru, Chile and Mexico.

Brazil’s central bank will publish its decision on its website after 6:30 p.m. in Brasilia, with a statement from its board. Here’s what to look for:

Short Cycle?

Investors will scour the bank’s statement for signs of the board’s next moves. While economists predict a “mini-cycle” of quarter-point hikes extending through January, traders bet policymakers could accelerate to half-point increases as soon as November.

“They need to be very cautious to not create more uncertainty and noise,” said Silvia Matos, an economist at Fundacao Getulio Vargas. Policymakers could signal they are likely to forge on with higher borrowing costs while refraining from giving specific guidance on the size of those increases, she said.

Monetary Policy Director Gabriel Galipolo, who has been appointed by Lula as the bank’s next governor starting next year, has pledged to do “whatever it takes” to slow inflation to target, adding that a rate increase is on the table today. Some investors have said he’s cornered the monetary authority into a hike after numerous public speeches in which he tried to bolster his credibility before investors.

At the same time, inflation is picking up as gross domestic product expanded more than expected in the second quarter.

“If they don’t hike now, their credibility will suffer,” said Helena Veronese, chief economist at B.Side Investimentos.

Fiscal Stimulus

Central bankers will likely refrain from making specific comments on the worsening fiscal outlook, avoiding direct confrontation with Lula. Instead, analysts expect them to highlight the importance of a balanced budget.

“The economy is significantly heated, as family consumption and credit flows increase, opening the door to inflationary pressures,” said Carla Argenta, chief economist at CM Capital.

Fed Cuts

Brazilian policymakers could nod to a more benign global scenario, especially as the Federal Reserve cuts rates for the first time since the pandemic.

Widening rate differential between both nations are likely to support the Brazilian real and, consequently, improve the local inflation outlook.

“Other emerging market banks will be cutting. So, from a carry-trade perspective, where could you find two-digit interest rates?” said Bret Rosen, a strategist at Emso Asset Management. “Brazil could be the only one on the list.”

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