50-Basis Point Brazilian Central Bank Rate Hike in Line with Forecasts

January 19, 2011

The monetary policy committee, COPOM, has implemented a fourth hike in its key Selic rate, which now becomes 11.25%.  From a low of 8.75%, three increases of 75 basis points, 75 bps and 50 bps were done in April, June and July of last year, but policy had been paused for a half-year before today’s move.  The combined 250 basis points of tightening including today’s move reverses half of a 500-basis point reduction in five steps between January and July of 2009.  Today’s decision came on a unanimous vote of COPOM.  The next meeting is set for March 1-2 and also seems likely to sanction a rate increase.

Brazilian CPI inflation, which is targeted at 4.5%, accelerated from 5.0% in October to 5.9% in December.  Real GDP grew about 7.5% last year and should expand more than 4% this year.  Unemployment has fallen to 5.7%, and the composite purchasing managers index advanced 1.5 points to 52.3 between October and December.  Expected inflation is at mounting upside risk because of the buoyant continuing real activity growth, the higher-than-targeted rate of inflation, elevated commodity prices, and excessive rainfall that will damage crops.

Policy tightening had been paused as officials became increasingly worried about the impact of the real’s substantial appreciation.  Brazil coined the expression “currency wars” and had taken various steps to moderate the dollar’s decline including assembling a war chest of resources to finance intervention.  The relentless rise of inflation, however, has forced the central bank’s hand, and this interest rate increase may put even more upward pressure on the real.  Even with 5.9% inflation Brazil has an attractive real central bank rate of 5.4% compared to the Fed’s inflation-adjusted 1.4% key interest rate. 

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



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