Central Bank of Brazil

January 22, 2015

Brazil has several sizable economic imbalances.  Inflation of 6.4% in the year to December is hovering around the top of the 2.5-6.5% target range in spite of the dive in global oil prices.  GDP contracted marginally between the third quarters of 2013 and 3Q14.  The current account and fiscal deficits are excessive, constituting around 4% and 5-6% of GDP, respectively.  Voters recently reelected a president, who hasn’t made the tough structural reform decisions and under whom Brazil’s economic image is suffering.  As host to the 2016 Olympics, it’s important for the country to secure improvement in a number of areas quickly, and it has fallen upon Copom, the Central Bank of Brazil’s monetary policy committee, to cut inflation.  With a past history of several bouts of hyperinflation, Copom is intent on cutting inflation toward the target midpoint by next year.  The main central bank policy lever, the Selic interest rate, had previously been cut ten straight times between August 2011 and October 2012, falling by 525 basis points to 7.25%, but such has now been lifted back by 500 bps to 12.25%.  The latest increase was announced in a statement today.  Like the prior increase on December 3, it’s 50 basis points in size, and like then, officials said the policy thereafter is neutral.  In fact, after the December increase, officials went out of their way to instruct markets that the increase was not necessarily part of series of such moves.  For a half year between April 2014 and October 2014, tightening had been paused.  Despite the pretence of another wait-and-see period, however, markets were prepared in their expectations for another tightening this month.  At 12.25%, the new Selic level is just 25 basis point from the mid-2011 peak.  One more move should bring the Selic level back to that 12.50% high, if not above such.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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