Brazilian bank chief says no rate cut in sight as inflation target elusive

Bloomberg

Brazil’s new central bank chief Ilan Goldfajn suggested it’s too early to think about cutting rates as inflation remains above target and the government has yet to implement budget cuts. Short-dated swap rates rose.
Consumer prices will increase 4.7 percent next year, still above the target set by the government, the central bank said in its quarterly inflation report on Tuesday. Policy makers see inflation slowing below the official target of 4.5 percent only in the first quarter of 2018, underscoring the challenges that lie ahead for Goldfajn and Finance Minister Henrique Meirelles, who has assembled a “dream team” of economic experts, according to Goldman Sachs.
Brazil has failed to meet its inflation goal for the past six years and the central bank is struggling with annual price increases that are nearly double the government’s target. Goldfajn, who will preside over the central bank’s interest rate decision for the first time in July, said he would stick to the 4.5 percent target for next year and that easing monetary policy needed to be done responsibly.“Seeking the center of the target in 2017 is ambitious and credible at the same time,” he told reporters in Brasilia. “A target of 4.5 percent in 2017 is our goal.”

No Room
In the inflation report, policy makers said there is no room to cut the benchmark Selic rate, citing the need for further fiscal adjustment and an unfavorable climate that is harming global food production. Answering questions from journalists, Goldfajn said members of the new economic team are working in tandem to boost investor confidence, pull the nation out of recession and quickly bring down inflation.
“Goldfajn is taking a hawkish stance here and is putting pressure on the government to deliver fiscal tightening before monetary easing can be justified,” said Win Thin, the head of emerging-market strategy at Brown Brothers Harriman Ltd. in New York.
The administration of Acting President Michel Temer will narrow its primary budget deficit gradually, rather than trying to close the gap all at once, a senior government official involved in the discussions said. The central government primary budget deficit, which excludes interest payments as well as the performance of municipalities and government-run companies, expanded to 15.5 billion reais ($4.7 billion) in May, the worst result in three months, the Treasury reported.
Traders are now increasing their bets that the central bank will delay a cut of the Selic. Swap futures maturing in January 2017 jumped 18 basis points to 13.83 percent in mid-afternoon trading, while the contract maturing in January 2023 dropped 11 basis points to 12.30 percent.

Inflation Ceiling
Brazil’s central bank is expected to miss the 6.5 percent ceiling of the inflation target in 2016 for the second consecutive year, according to the inflation report. Analysts surveyed by the central bank forecast the benchmark rate will drop 100 basis points this year, from the current level of 14.25 percent. They pared down bets on a more aggressive easing cycle after inflation expectations spiked earlier this year.
The central bank forecasts the Brazilian economy will shrink 3.3 percent this year following a 3.85 percent contraction in 2015. In March, the bank estimated gross domestic product would fall 3.5 percent in 2016.
Brazil’s monetary policy committee will set an inflation target for 2018 on June 30, when it can also review the 2017 goal, currently at 4.5 percent with a tolerance range of plus or minus 1.5 percentage points. O Globo newspaper on Tuesday reported that the committee will keep the target at 4.5 percent in 2018, with the same tolerance margin. The committee includes the head of the central bank and Finance Ministry.