BRASILIA: Brazil’s central bank risks causing unnecessary damage to a struggling economy if it raises interest rates even more in coming weeks, a growing number of economists and business leaders warn.
Central bank chief Alexandre Tombini has already increased the benchmark Selic rate by 3.25 percentage points since October, taking it to a whopping 13.25 percent even though the economy is expected to shrink at least 1 percent this year.
Brazil’s rate hike cycle, the most rigorous among major economies in 2015, is an effort to tamp down inflation, currently running at above 8 percent, and regain investor confidence after some of President Dilma Rousseff’s leftist economic policies backfired.
Brazil’s interest rates are already the highest among the world’s 10 largest economies.
Recent comments by central bank officials have led financial markets to believe that Tombini and his board will raise the Selic by another 50 basis points when the board next meets on June 2-3.
Some are pricing in additional increases at subsequent gatherings in July and September.
After overwhelmingly supporting Tombini’s efforts in the last few months, economists from some of Brazil’s leading banks have begun voicing misgivings.
In recent interviews with Reuters, several expressed concern that Tombini risks going too far given the weaknesses in Latin America’s largest economy. Unemployment rose to a four-year high of 6.4 percent in April, data showed last week.
“Because of the recession, (inflationary) pressure is already very weak. In that sense, raising rates further is an exaggeration,” said Jos? Francisco de Lima Gon?alves, chief economist at Banco Fator, in Sao Paulo.
Octavio de Barros, head of economic research at Banco Bradesco, said it was “understandable” that the bank was trying to bring inflation down, but added: “Keeping interest rates unchanged would be enough.”
Tombini reiterated on Tuesday that monetary policy has to stay “vigilant” to bring inflation down to its target of 4.5 percent by end-2016, a comment that many in financial markets interpreted as a harbinger of coming rate hikes.
The central bank itself currently forecasts 2016 inflation to stay above that goal, at 4.9 percent.
Recent comments by central bank director Luiz Awazu Pereira at closed-door meetings with economists also sounded hawkish, participants said, by reiterating the bank’s “vigilance”. A central bank spokesman said the bank would not comment on the opinions of market analysts.
