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Wednesday, April 16, 2008

Brazil Central Bank Raises Interest Rates

As indicated on this blog yesterday Brazil’s central bank have increased interest rates - although they surprised markets with a 0.5 percentage point increase, double the amount most economists expected. The rise brought to an end more than two years of rate cuts amid mounting concerns that consumer price inflation will exceed the government’s target this year.

The bank’s monetary policy committee (Copom) had held its target overnight rate, known as the Selic, at 11.25 per cent since the autumn of last year, after two years of cuts from a peak of 19.75 per cent. The bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999.

The real closed at R$1.66 to the dollar on Wednesday, its strongest level in nine years, on the back of the expected rate increase.

The Copom said it had opted for a 0.5 point increase as it wished to act immediately by introducing significant part of the monetary tightening that would be necessary to reduce the risk of rising inflation and reduce the size of the total increase to be implemented in the Selic rate.

Latin America's biggest economy grew 6.2 percent in the fourth quarter of 2007, more than twice the pace of the past decade. Bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth and sparking inflation. Brazil's economy expanded an average of 3.8 percent from 2003 to 2007, the second slowest in South America. Argentina led the region with 8.8 percent, followed by Venezuela with 7.9 percent and Uruguay with 6.9 percent, according to International Monetary Fund data.

A surge in food prices and rising consumer demand have pushed annual inflation in Brazil from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month. Brazil has the second slowest inflation in the region, after Mexico, according to Bloomberg data. In Chile, inflation has jumped to 8.5 percent in March from 2.6 percent in the year- ago month.

Over the past two years consumer demand has taken over from the export sector as the main driver of growth in Brazil. Falling unemployment, rising salaries and cheaper credit have driven a consumption boom, especially of credit-sensitive items such as cars and household electrical goods. About 2.4m vehicles were sold in Brazil last year – an increase of nearly 28 per cent over 2006. Strong demand continues across the economy this year. Retail sales in February were up by 12 per cent, year on year.

Lending by banks has climbed at least 20 percent in each of the past three years. Car sales jumped 30.5 percent in February from the year ago month, while home appliance and furniture sales climbed 17.8 percent, according to figures from the national statistics agency.


Anonymous said...

Just found this blog. Not much out there on Brazil, but there will be before too long.

Thanks for the blog, though. I will come back frequently.

Anonymous said...

Ok, back again, with a relevant comment this time.

What is fueling Brazil's inflation? They are self-sufficient energy-wise. I am not sure of their status as a food importer/exporter, but I can't imagine that they import much in that area. They have a relatively tight monetary policy (can you imagine if they ever get below 10%?). And the Real floats freely, unlike many other dollar-pegged countries that are suffering from inflation.

So what gives?

Edward Hugh said...


And thanks for the interest.

"What is fueling Brazil's inflation?"

This is a complex question, and I'm not sure I can offer a very complete answer, since I set this blog up as much to monitor Brazil, and get a feel for what is happening there, as much as for any other reason, so I really wouldn't consider myself at this point to be any kind of "expert" on the Barzilian economy.


Firstly the inflation is not that severe, so I don't think we should get things out of proportion here. What I think is the case is that the Brazilian monetary authorities don't want to let it get out of hand. This would be the point.

When i say it isn't that severe, I am refering to comparisons with Eastern Europe, Ukraine, Russia, Vienam, and China. India is even pushing 7% now. And of course in Latin America there is Argentina, which is much worse news.

Secondly you need to think that the more that Brazil opens itself economically the more it is subject to global prices. So it really doesn't matter if it is self sufficient in food and energy, if exporters can get the global price then they will want to export, and this impacts back on the domestic price.

The recent decisions about "will-we, won't we" on exporting rice were quite instructive here.

So in this context in the short term economic openness can be inflationary, even if in general, and in the longer term it almost certainly isn't.

Then you have to think about local capacity limits and the rapid rise in domestic demand which is accompanying all those capital inflows. This short term pressure produces bottlenecks of all kinds, most of which have a solution in the longer run.

Obviously letting the real rise can help contain inflation, but at the same time has an impact on the trade balance, which is why the Brazilian authorities are anxious not to let it rise too quickly.

OK, they are just a few brief points. I hope you found them useful.

If you are at all interested in something more extensive on the whole global price issue, you might like to go to the Demography Matters blog (link in sidebar) and leaf throught he lengthy - Food Prices, Farmland, Global Rebalancing and Rural Labour Shortages - post I wrote earlier in the week. Since Brazil is quite reource rich in land, labour and now (with the inflows) capital at this point I imagine we can only expect that she will be a major beneficiary of the sudden shift up the value chain of agricultural activity.