A Second Central Bank Interest Rate Hike in Brazil

May 29, 2013

Brasília-Giving continuation to the basic interest rate adjustment, the Copom decided unanimously to raise the Selic rate to 8.00% per year, without bias.  The Committee notes that this decision will contribute to put inflation on the decline and ensure that this trend will continue next year. 

In several ways, today’s decision by the Central Bank of Brazil’s monetary council know as Copom was a more forceful attack on Brazilian inflation.

  1. The size of the rate increase was twice as large as the first increase on April 17.
  2. Officials are swimming against the tide of other central banks.  In no other G20 economy has the central bank tightened recently.
  3. Brazil’s economy is sputtering.  Smaller-than-expected GDP growth in 1Q13 of 0.6% trimmed the on-year pace to 2.2% from 2.6% in the final quarter of 2012. 
  4. Officials disregarded the fact that inflation slowed from 6.6% in March to the target ceiling of 6.5% in April.  They are worried that if sustained at these levels, expected inflation will drift upward.

Back-to-back Selic rate hikes in April and May have lifted the level to its highest point since late July/early August 2012.  Ten reductions between August 2011 and October 2012 depressed the Selic rate level from 12.5% to 7.25%.  Because of the weak GDP figures and other signs of tepid domestic demand, most analysts were expecting Copom to hike the Selic rate by just 25 basis points again.  The decision was unanimous, however.

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

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