Central Bank of Brazil

January 16, 2014

The monetary policy committee, Copom, raised Brazil’s Selic Rate by 50 basis points, twice as much as expected.  There were also increases of 50 basis points implemented last year in November, October, August, July and May as well as an initial 25-bp hike done in April.  The new Selic Rate of 10.5% hasn’t been this high since a brief interval from November 2011 to January 2012.  A released statement notes that the decision was taken unanimously but adds a clause “at this moment” that is shown in italics and which suggests that officials are inclined to reduce the size of the next increase or even pause the uptrend: 

Continuing the adjustment process of the basic interest rate, initiated at the April 2013 meeting, the Copom unanimously decided, at this moment, to increase the Selic rate by 0.50 p.p., to 10.50 percent, without bias.

Brazilian monetary officials face a dilemma.  On the one hand, inflation above 6.0% is proving stubbornly resistant to the tightening of monetary policy, and Brazil has a legacy of hyperinflation that nobody want to see return.  On the other hand, real GDP fell in 3Q13, and the growth outlook is poor.  Much of the inflation has been imported via a depreciating exchange rate.  As the currency of an emerging market with a chronic current account deficit, the Brazilian real is vulnerable as markets look ahead to more Fed tapering.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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