September 13, 2011

On August 31, the Central Bank of Brazil become the first to cut its key rate after extensive post-recession tightening.  COPOM, the bank’s policymaking authority, had slashed its key Selic Rate five times by a total of 500 basis points in the six months between January 2009 and July 2009.  But in eight steps beginning with a hikes of 75 bps each in April and June of 2010 and ending with 25-bp increases in April, June and July of this year, officials reversed 375 bps or three-quarters of the easing.  The Selic Rate was at 12.50% and expected to be held steady when COPOM met at the end of last month.  On-year CPI inflation had accelerated from 6.0% last January to 6.9% in July and 7.2% in August.  But the world environment was darkening noticeably.

On August 31, officials surprised analysts with a 50-basis point Selic Rate cut to 12.0% and released a statement that asserted that the international economy had taken on a “deflationary bias” that justified a prompt mitigating monetary policy counter-move against the restrictive headwinds.  The 50-basis point move was called “moderate” and “consistent with the scenario of convergence of inflation to the target in 2012.”  Two of the seven members of COPOM dissented from the vote to ease, preferring to leave the benchmark at 12.5%.  Real GDP expanded a shade more than 3% last quarter.  The next rate announcement will be made October 19.  In the meantime, the global economy and financial market behavior will be watched closely for guidance on future policy decisions.

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



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