Smaller-Than-Expected Brazilian Central Bank Rate Hike
July 21, 2010
Policymakers at the Central Bank of Brazil, known as COPOM, lifted their key Selic rate for a third time but by a lesser 50 basis points to 10.75%. Analysts were predicting a move of 75 basis points like those announced on April 28 and June 9. Nonetheless, the cumulative advance of 200 basis points thus far is the most of any central bank, topping Australia’s 150 basis points done via six moves. Five cuts in 2009 – done in January, March, April, June and July – reduced the Selic Rate by 500 basis points from a cyclical high of 13.75%.
The case for tightening had been clear-cut in Brazil. GDP in the first quarter shot up 11.4% annualized and was 9.0% greater than in the first quarter of 2009. Industrial production is running nearly 15% above its year-earlier level. Growth had to be cooled if the 4.5% inflation target in 2011 is to be hit.
Hindsight, as they say, is 20:20, but the case for reducing the size of the rate increase also seems reasonable even though hardly any pundits predicted the move. Consumer price inflation dipped marginally on month in July and to a 12-month pace of 4.7% from 4.8% in June and 5.2% in May. Based on information like a tiny dip in the economic activity index in May, it seems very likely that GDP will record significantly slower growth in the second quarter. Tighter fiscal policy will exert an additional drag in the current quarter, and the economic outlook elsewhere, as Bernanke put it, is “unusually uncertain.”
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
Tags: Brazil, Selic Rate
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