Bloomberg News

G-20’s Highest Interest Rate Too Low to Curb Brazil’s Inflation in Survey

February 24, 2012

Brazil’s inflation-adjusted interest rate, the highest within the Group of 20 nations, is too low to help the nation meet its price-growth target, a central bank survey of economists shows.

The real interest rate needed to keep inflation on target with the economy growing at a sustainable pace is 5.5 percent, according to the median estimate in the survey published yesterday. That is higher than Brazil’s current real rate of 4.3 percent.

Policy makers said last month there is a high chance they will cut the benchmark Selic rate to less than 10 percent this year, from the current 10.5 percent. Since August, the central bank has cut the Selic four times, reduced taxes and pledged to boost public investment to shield Latin America’s biggest economy from European debt turmoil and ensure growth of 4.5 percent this year.

“The market doesn’t believe it is feasible to keep interest rates at one digit for a long period,” said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York. “This is what the neutral interest rate of 5.5 percent is telling us.”

Traders are betting central bank President Alexandre Tombini will cut the Selic to at least 9.25 percent by July, according to Bloomberg estimates based on interest rate futures.

Policy makers will need to reverse course and raise rates again to 11 percent next year, to prevent inflation from picking up, futures also show.


The yield on the interest rate future contract maturing in January 2014, the most traded in Sao Paulo today, rose 6 basis points, or 0.06 percentage point, to 9.73 percent at 10:23 a.m. in Brasilia, its biggest increase in three weeks. The real strengthened 0.3 percent to 1.7087 per dollar.

The real neutral interest rate was 6.75 percent in November 2010, according to the median forecast in a previous central bank survey. Brazil has the highest real interest rate in the Group of 20 Nations.

The survey also found that the so-called NAIRU, or non- accelerating inflation rate of unemployment, is 6.5 percent, higher than the average jobless rate of 5.9 percent over the 12 months through January. The central bank did not say how many analysts took part in the survey.

In its quarterly inflation report published Dec. 22, the central bank said that the tight labor market is a “significant but declining” risk for inflation.

Room to Cut

Speaking this month in Mumbai, Tombini said Brazil has room to continue cutting its benchmark rate without fueling inflation. Tombini has repeatedly pledged to slow inflation to the 4.5 percent mid-point of its target range this year.

The country’s annual inflation rate fell to 6.22 percent in January, from 6.5 percent in December, after exceeding the upper limit of the target for eight months last year.

Analysts expect consumer prices to rise 5.24 percent this year, and 5.02 percent next year, according to the median forecast in a Feb. 17 central bank survey.

“For the central bank, the neutral interest is lower than 5.5 percent,” said Jankiel Santos, chief economist at Espirito Santo Investment Bank. “This means we’re going to continue to see a discrepancy between inflation estimates by the market, and those of the central bank.”

To contact the reporter on this story: Matthew Bristow in Brasilia at

To contact the editor responsible for this story: Andre Soliani at

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