April 11, 2017 / 5:37 PM / a year ago

Brazil risks being too hawkish with 100-point rate cut -economists

BRASILIA, April 11 (Reuters) - It is not everyday a central bank is branded hawkish for expectations it will cut interest rates by 100 basis points, but that is how many economists, business leaders and politicians see Wednesday’s rate decision in Brazil.

All 38 economists polled by Reuters expect the central bank to slash its benchmark Selic rate by one percentage point to 11.25 percent, marking Brazil’s fastest decline in rates since 2009.

Yet with inflation falling more rapidly than expected, critics say the bank should be acting faster to get borrowing costs into single digits to lift Latin America’s biggest economy out of its worst recession in decades.

Inflation has tumbled from more than 10 percent in 2016 to 4.57 percent last month, but the central bank has failed to keep pace, some economists said. Rates stand at 12.25 percent, down only two percentage points after four consecutive cuts, and still among the highest of any of the G20 industrialized economies.

“These cuts are too small for the size of the hole we’re in,” said Maria Cristina Zanella, head of economic research at Brazil’s machinery industry association Abimaq. “The faster we get to interest rates of 8, 8.5 percent, the better.”

Debate centers on the real interest rate - what an investor pays or receives after allowing for inflation. So-called ex-post real rates have climbed to their highest in a decade at 8.8 percent, according to central bank calculations.

The bank, however, prefers to calculate real rates based on inflation expectations and interest rate futures because that is the metric used by consumers and firms to decide investments.

That rate, so-called ex-ante, has fallen to 4.7 percent because futures markets are pricing in a long sequence of rate cuts. This suggests monetary policy is no longer tight and should spur growth in coming months.

The market expects both measures to stabilize at about 5 percent by year-end, according to the central bank’s latest quarterly inflation report.

The central bank says such disconnect is normal when inflation slows quickly. However, some economists argue policymakers should close the gap faster.


“Given that Brazil is in a balance-sheet recession, with firms and families still too indebted and going through a deleveraging process, ex-post rates are also a matter for concern,” wrote Carlos Kawall, chief economist of Banco Safra, urging the bank to “frontload” cuts.

The bank also faces political pressure. Renan Calheiros, Senate leader for Brazil’s largest party, said after the bank’s February policy meeting that interest rates were “immoral” and should be falling faster.

Still, not all business leaders are frustrated with the cuts.

Retail and industry confidence indicators are at their highest levels since 2014. Some companies have already seen benefits from recent easing. Executives of real estate company builder BR Properties SA and retailer GPA SA forecast savings of 30 to 40 million reais in expenses for every 100-point rate cut.

Brazil’s economy is expected to expand 0.5 percent this year, ending a two-year recession.

The central bank has said monetary policy will contribute to faster growth but signaled it is unwilling to move too quickly due to uncertainty about the level at which interest rates start fueling inflation.

Given Brazil’s past rollercoaster ride with consumer price rises, that comes as no surprise to many.

“The central bank would be wise to resist giving in to market pressure,” said Andre Perfeito, chief economist at Gradual Investimentos. “If something happens, it will be easier for it to get the ball under control again.”

Reporting by Silvio Cascione; Editing by Daniel Flynn and Andrew Hay

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