As headlines go yesterday’s “Brazilian economists raise forecasts for interest rate increases” is no “Dewey defeats Truman.”
But it is still downright misleading. If all you read is the headline, you’re likely to come away with a belief that the turn in Brazil’s interest rates is much further off than anyone expected and that the day to invest in Brazilian stocks has been pushed way out into the future.
Exactly the opposite is actually the case. Those pessimistic economists are just confirming a forecast that sees Brazil’s central bank ending the interest rate increases that are slowing the Brazilian economy and putting additional downward pressure on Brazilian stocks in December 2010.
Here’s what’s behind the headline. With the Brazilian economy growing faster than expected and inflation kicking up more than expected, Brazilian economists now believe that the Banco Central do Brasil won’t stop raising interest rates until the benchmark Selic rate hits 12.13% in December.
That’s a huge change, NOT, from earlier forecasts that called for the central bank to raise rates to 12% in December before stopping.
Yep, that’s it. The forecast is still for an end to interest rate increases in December. But now economists believe the end of the year benchmark rate will soar 0.13 percentage points above earlier forecasts.
If you want to see that as big news, go right ahead. Me? I see it as confirmation that the bank will be done at the end of the year and the benchmark rate then will be somewhere around 12%.
If you do the math that seems to be an extremely likely outcome. The current benchmark rate is now 11% after the Banco Central raised rates by 0.75 percentage points at its last meeting. Economists expect that the bank will raise the Selic rate another 0.75 percentage points at its July 20-21 meeting. That would leave the bank just 0.38 percentage points from the 12.13% rate that economists are forecasting for December.
Given that economists are expecting another 0.75 percentage point rate increase at the September meeting of the central bank, I’d have to say that there’s a good chance for a September surprise when the bank raises rates less than expected.
Add in the likely slowing of Brazilian exports as growth in both China and the European Union slows and I think the end of the year target for rates stands a good chance of being correct.
That would let Brazil’s central bank gradually lower rates in 2011 if the economy falters or inflation slows. Brazil’s benchmark rate hit an all-time low of 8.75% in March. A return to just that level gives the bank a whole lot of room if it needs to keep growth in Brazil humming.
The U.S. Federal Reserve and the European Central Bank would give their striped ties for that kind of margin in interest rate policy.