Brazil cannot rule out further interest rate increases if inflation continues to pick up, a source closely familiar with the thinking of the country’s central bank told Reuters on Thursday.

The country’s efforts to deal with rapid capital inflows and an appreciating currency through unorthodox policy steps like capital controls and exchange interventions have been successful, the source said in an exclusive interview.
Rapid capital inflows into Brazil, in part a product of low interest rates throughout the developed world, is inflationary and potentially destabilizing, and requires central bank action, the source said.
The real BRBY recently hit a two-year high against the dollar, boosted by Brazil’s strong growth and the low returns available in rich countries. It jumped almost 2 percent just hours after the announcement of the latest currency measure -- an extension of taxes on foreign loans.
Unconventional policies do carry risks and make communications with the markets more difficult, the source said. But at the same time, they are helpful at a time when the central bank finds itself in a policy quandary.
At the moment, financial markets are expecting Brazil’s central bank to pause for breath after another rate hike at its meeting next week, particularly since annual inflation sped near a government ceiling through March to 6.3 percent. Policymakers are targeting inflation of 4.5 percent plus or minus 2 percentage points this year.
Fourteen of 26 analysts polled by Reuters see the benchmark Selic lending rate being raised 50 basis points to 12.25 percent next week from 11.75 percent. Eleven analysts see the rate rising 25 basis points to 12.0 percent, and one sees the Selic steady.
But the well-placed source told Reuters rising inflation expectations reflected in the latest central bank survey could not be ignored. The central bank cannot wait for the weight of “gravity” to bring down inflation, the source said.
The comments suggested investors may have become too complacent about expecting Brazil’s central bank to hold off on further rate hikes in the second half of the year.
As far as Brazil’s role in the Group of 20 major world economies is concerned, Brazil should push for greater oversight of derivatives and the “shadow banking system,” the source said.
“Macroprudential measures help moderate the growth of credit beyond levels considered prudent,” the source said.
Brazil’s economy is set to grow about 4 percent this year, less than the 7.5 percent surge of last year but still better than most of the developed world.
The investment-grade nation has some of the world’s highest interest rates, with its benchmark rate at 11.75 percent. That is in stark contrast to the euro zone’s 1.25 percent, even after a rate hike by the European Central Bank on Thursday.
The U.S. Federal Reserve has not only set short-term rates near zero but also sought to keep down long-term borrowing costs through heavy purchases of government securities.
(Source: Reuters)