Brazil slows interest rate hikes to shield weak economy
Brazil slowed the pace of monetary tightening on Wednesday, signaling it may be near the end of a rate-hiking cycle that threatened to tip Latin America's largest economy into a recession.
The central bank's monetary policy committee voted unanimously to hike its Selic rate by 25 basis points, breaking a streak of six straight 50-basis-point hikes that took the benchmark rate to its highest level in over two years.
The bank kept its post-decision statement almost unchanged from the previous one, only removing a phrase added at its last meeting that said the decision had been taken "at this moment."
While the bank did not close the door to raising rates again at its next meeting in April, many economists saw the decision as a signal that it may soon end one of the world's most aggressive monetary tightening cycles.
"The central bank is signaling that it is ready to end the cycle," said Andre Perfeito, chief economist at Gradual Investimentos in Sao Paulo. "The bank is being more cautious due to a sense that economic activity can slow down a lot in 2014."
Smaller rate hikes from now on would come as a relief for President Dilma Rousseff, who has watched Brazil's economy slow to a crawl since taking office in January 2011. Rousseff plans to seek a second term in October and is eager to see an economic revival before the elections.
Brazil nearly slipped into a recession in the second half of 2013, according to economists polled by Reuters last week. Official data set for release on Thursday is expected to show the economy expanded by a meager 0.3 percent in the fourth quarter from the previous quarter, according to the poll.
The end is near
The central bank, which slashed rates to record lows in 2012, has been forced to add 350 basis points to the Selic since April to battle a spike in inflation, which started to curb consumption in Latin America's largest economy.
Interest rates are now back to where they were three years ago when Rousseff took office, promising to lower the cost of borrowing.
While central banks from other emerging nations have just started to hike rates to stem a renewed exodus of foreign capital, the Brazilian central bank has signaled its tightening cycle may be coming to an end.
The bank's president, Alexandre Tombini, said last week that past rate hikes have helped slow inflation, a hint that the bank has already done much of its job.
Annual inflation eased to 5.59 percent in January, its lowest level in more than a year, but still remains at the upper end of the official target range of 2.5 percent to 6.5 percent. A possible increase in energy rates due to a severe drought and naggingly high services prices will keep inflation under pressure this year, analysts say.
The stability of the Brazilian real, despite the recent sell-off in emerging market assets, is another reason the bank may opt to bring the tightening cycle to an end soon.
The central bank has said a weaker real dilutes some of the effects monetary policy has over inflation. A weaker real increases the value of imported goods, which Brazilians continue to snap up at a rapid pace.
Most private economists expect the bank to raise interest rates to 11.25 percent by the end of 2014, according to a weekly central bank poll.
Another factor that could ease pressure on the central bank to keep raising rates is a new effort by the government to limit spending this year.
Last week, the Rousseff administration pledged to freeze 44 billion reais ($18.8 billion) in spending to meet a more "realistic" fiscal savings goal this year. The government has promised more fiscal austerity in a bid to regain investors' trust after missing the target in the last two years.
If the government follows through on its promises to limit spending it could help the central bank control inflation by slowing the rate of consumption.
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