Brazilian Key Interest Rate Left Unchanged at 10.75%

October 20, 2010

Brazil’s monetary policy committee, COPOM, retained a 10.75% Selic rate, matching analyst expectations and the result of its prior meeting on August 31.  Previously, the Selic rate was lifted by 75 basis points on April 28, another 75 bps on June 9, and 50 bps on July 21.  The Central Bank of Brazil targets inflation at 4.5% give or take two percentage points.  Inflation had been at 4.7% last month but accelerated to 5.0% in October.  Real GDP slowed to a 5.1% annualized rate in the second quarter but was 8.8% greater then than a year earlier.  Officials in Brazil were the first to coin the phrase “currency war,” and finance ministry officials are not planning to attend this weekend’s meeting of G20 finance ministers and central bankers.  It’s every government for itself.  Times have completely changed since the 1980s when Brazil’s currency moved only downward.  The real is presently almost 40% stronger than it was at the end of 2008.  During the world recession of 2008-09, five cuts of the Selic rate totaling 500 basis points were engineered between January 2009 and July 2009.  Forty percent of that stimulus has been reversed thus far.  To tighten further as the Fed and other advanced economy central banks contemplate more quantitative easing would invite further upward pressure on the real.  Besides not raising interest rates, Brazil is tightening controls against capital inflows.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express  permission.



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