Another 75-Basis Point Cut of the Brazilian Selic Rate

April 18, 2012

COPOM, the Monetary Policy Committee at the Bank of Brazil, authorized a sixth reduction of the Selic interest rate since last August 31.  The first four moves were 50 basis points in size from a peak of 12.5%.  This month’s cut, like that made at the March 8 meeting, was 75 bps in size.  The cumulative 350 basis points of ease almost offsets the 375 bps of tightening in 8 steps from April 2010 to July 2011 and leaves the Selic rate a mere 25 basis points above the all-time low of 8.75% level from July 2009 until April 2010.

This series of rate reductions have been controversial.  A key motivation has been to support the government in resisting an appreciating currency.  It was Brazil that first coined the phrase “currency wars.”  The concern is that by subordinating domestic monetary policy to an exchange rate objective, undue risks with future inflation are being taken.  Brazilian consumer prices advanced 5.2% in the year to March.  That’s just 0.7 percentage points more than the midpoint of the 2.5-6.5% target band, but the problems isn’t with inflation now but where such might be headed in the medium term.  GDP growth slowed sharply to 2.7% last year from 7.5% in 2010, and the IMF is projecting growth of 3.0% this year followed by 4.1% in 2013.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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