Brazilian and Indian Monetary Policy Decisions

August 1, 2018

Central Banks in two of the four BRIC economies held monetary policy reviews. Coincidentally, while the Brazilian Selic rate was left unchanged at 6.50%, the Indian repo rate was lifted 25 basis points to rest also at 6.50%. Previously, the Selic rate was lowered sharply by 50 basis points in 2016, 675 bps last year and 50 bps in the first quarter of 2018 but not more recently. From a high of 8.0% attained after a 25-basis point hike in January 2014 and maintained for a year thereafter, the Indian repo rate was reduced by 125 basis points in 2015, 50 bps in 2016, and 25 bps in August 2017 but thereafter hiked twice this year, first in June and again today. Each of these central bank nominal rate levels are comparatively high because so too as of mid-2018 were inflation of 4.4% in Brazil and 5.0% in India.

The Central Bank of Brazil’s statement¬†“reiterates that economic conditions prescribe accommodative monetary policy, i.e., interest rates below the structural level….¬†Copom judges that it should base its decisions on the evolution of inflation projections and expectations, of the balance of risks, and of economic activity. Shocks that produce relative price changes should only lead to a monetary policy response to their possible second-round effects (i.e., to the propagation to prices in the economy that are not directly affected by the shock). It is through such second-round effects that these shocks may affect inflation projections and expectations, and change the balance of risks.” Officials at the Central Bank of Brazil expect inflation to settle back to average 3.8% next year. The global environment poses special risks “associated with normalization of interest rates in some advanced economies and with uncertainty regarding global trade.”

The statement from the Reserve Bank of India’s Monetary Policy Committee proclaims that a 6.5% repo rate is consistent with a neutral monetary policy and predicts that inflation will move within a target band of 4% +/- 2%. Officials expect growth to be sustained but are watching global risks carefully. Developing economies dependent on capital inflows are especially vulnerable to trade policy conflicts and the RBI’s statement warns, “Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices
continue to be the other sources of risk to global growth.”

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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