Brazilian Monetary Policy Possibly Moves Closer to a Trend Reversal

March 6, 2013

Brazilian monetary policy is decided by Copom, a committee at the central bank, and such has been in easing mode since a 50-basis point Selic rate cut to 12.0% in August 2011.  Nine more reductions ensued, the most recent of which was a 25-bp cut last October.  That move left the key interest rate at a stimulative 7.25% where it has stayed ever since. A statement after today’s latest meeting that kept the rate steady, however, deleted some crucial language from the prior statement in January, which had opined that “the stability of monetary conditions for a sufficiently long period of time is the most adequate strategy to guarantee the convergence of inflation to the target.” 

The new statement is short and does not include similar language that it could be quite a while longer before policy needs to be tightened.  The new statement reads simply,

Brasilia- Assessing the macroeconomic situation and the prospects for inflation, Copom unanimously decided to maintain the Selic rate at 7.25% p.a., without bias.  The Committee will follow the development of the macroeconomic scenario until their next meeting, to then define the next steps in its monetary policy strategy.

Policymakers are in a tough bind because Brazil has both too little economic growth—a mere 0.9% in the year to 3Q12 — and inflation that at 6.18% is creeping perilously close to the target ceiling of 6.5%.  The deleted language in today’s statement was preceded by recent central banker remarks expressing greater concern about inflation and hinting at a readiness to respond to such more actively.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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