Brazil Left Rates Steady, But April Hike More Likely

In what we thought was a close call, the central bank of Brazil left its overnight rate steady at 8.75%, a record low. The decision was made by a 5-3 majority. The dissenters wanted a 50 bp rate hike.

The closeness of the vote is a strong signal that barring a significant downside surprise over the next several weeks, Brazil's central bank will hike rates and in so doing could very well be the first BRIC country to formally hike rates. Both China and India have raised reserve requirements, but neither has hiked benchmark rates.

The political future of current central bank governor Meirelles may have been the wild card. However, if he does resign to enter electoral politics, his successor will have the opportunity to brandish anti-inflation credentials at the very first meeting and deliver a 50 bp rate hike.

Until the next COPOM meeting in late April, key things to monitor would be of course Meirelles' decision which has to be made by very early April.

In terms of economic data, there may be some seasonal distortion to Brazil's price pressures. Watch the inflation reports and the central bank's survey of expectations.

On the real economy side, key economic measures include industrial production and retail sales. The relative strength of the currency against the dollar does not appear to be a very salient issue, but if in six week's time the dollar is testing support in the lower part of the BRL1.60 and volatility has increased, the exchange rate could become more important. That said, currency strength is consistent with monetary tightening in a way it wasn't when Brazilian officials were trying to fuel a recovery. A stronger BRL could help dampened imported price pressures on the margin.