Brazilian Central Bank Flinches

January 21, 2016

The rhetoric late last year from Copom, the monetary policy committee at the Central Bank of Brazil, had encouraged market players to expect another tightening of the Selic interest rate, which from April 2013 to July 2015 had been lifted from 7.25% to 14.25%.  Even though 14.25% represents the highest Selic rate level since October 2006, inflation had continued to accelerate, fanned by on-year real depreciation against the dollar of more than 35% and some administered price hikes.  The embattled government of Brazilian President Dilma Rousseff had been outspokenly opposed to further monetary tightening, but it was thought that the Selic rate would be raised another 50 basis points given the inflation problem, where consumer prices rose 10.5% in the year to November versus a target limit of 6.5%, plus a mounting need for monetary officials to demonstrate that they have the main say-so in guiding the Selic rate.  Instead Copom voted 6-2 to stand down, presumably defending the decision as correct in light of global financial risks, but investors’ take-away includes further suspicion that the central bank cannot act independently anymore.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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