A Smaller Brazilian Rate Hike

April 20, 2011

Brazil’s committee of monetary policymakers, known as COPOM, has implemented its sixth rate hike of the cycle, increasing the benchmark Selic rate to 12.0% from 11.75%.  In the earlier Great Recession, the Selic rate was cut in five moves from 13.75% at the end of 2008 to 8.75% by July 2009, and that low was maintained until an increase of 75 basis points undertaken one year ago in April 2010.  Today’s 25-basis point move was the smallest of the six increases during the past year and also less than the street consensus expectation. 

Brazilian officials are hoping that the lagged effect of the 325 basis points of tightening thus far, which reverses two-thirds of the earlier easing, will suffice to reduce inflation eventually, along with other steps like higher reserve requirements, capital and credit controls, and tighter fiscal restraint.  However, inflation has already climbed to 6.44%, just shy of the ceiling of the 2.5-6.5% target range.  Global commodity price strains show no sign of letting up, and domestic credit has been expanding very rapidly, with an on-year increase of more than 20%.  Many believe that central bank officials are too optimistic in projecting inflation next year around the center of the target range.  They appear to have been motivated by concern that more aggressive monetary tightening could have fanned the Brazilian real’s appreciation unduly.  Having started the current cycle of interest rate increases with two hikes of 75 basis points each, the Bank of Brazil now conspicuously stands out for throttling back to a 25-bp increment when many other fast-growing emerging economies are seeing their monetary restraint programs intensify.  Brazil has a legacy of hyperinflation that had hopefully been relegated to history’s dust bin.  It would be regrettable if central bank officials were to reopen that Pandora’s Box.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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