Dramatic Reversal of Brazilian Monetary Policy

September 1, 2011

Brazilian monetary authorities unexpectedly cut the key Selic interest rate by 50 basis points to 12.0% on August 31.  A statement released by COPOM, the policy committee, justified the action because of the sudden emergence of a “deflationary bias” in the international environment due to worsening growth estimates, limited scope for more monetary stimulus among advanced economies, and increasingly restrictive fiscal policies.  The statement mentions a number of channels by which worsening advanced economy conditions may be transmitted to emerging economies like Brazil.

COPOM had cut the Selic rate from 13.75% prior to October 2008 to 8.75% in June 2009. 375 basis points of that stimulus had been unwound after several hikes between June 2010 and July 2011, the last two of which being increases of 25 basis points on June 8 and July 20. 

Brazil thus becomes the first central bank to cut rates after an extensive cycle of tightening them.

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



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