Tags: Brazil | Hikes | Key | Rate | Inflation | Threat | Looms

Brazil Hikes Key Rate to 11.75 Percent as Inflation Threat Looms

Thursday, 03 Mar 2011 07:27 AM

Brazil raised interest rates for the second time in three months, opting for an increase in line with market expectations despite mounting concerns about the pace of inflation.

Central bank policymakers voted unanimously to lift the benchmark Selic rate to 11.75 percent from 11.25 percent, even though some economists had recently changed their forecasts for a rise to 12 percent on worsening inflation expectations.

"Continuing the process of adjusting monetary conditions, the Copom unanimously decided to raise the Selic rate to 11.75 percent per annum, without bias," the central bank said in an unusually short statement that offered no insight about the outlook for rates going forward.

The market saw the meeting as a test for new central bank chief Alexandre Tombini, who was under pressure to show he could withstand political pressure and raise rates to curb inflation, a perennial threat to Brazil's economy.

"With the 50-basis-point-rise, the central bank is saying that they are doing their duty, which is to increase the Selic — mindful that this increase will accompany other instruments such as macroprudential measures and the fiscal adjustment, in attempts to control inflation," said Newton Rosa, chief economist at SulAmerica Investimentos in Sao Paulo.

"The market will continue (to be cautious). In the end, this rise could imply new credit control measures that the government could adopt later on," he added. Brazil has increasingly leaned on measures besides rate hikes — such as making banks hold onto more of their deposits and slashing public spending — to try to avoid steeper interest rates. But analysts say that tighter borrowing costs are still the bank's best weapon against inflation, despite the risks involved.

The rate hike forced the central bank to weigh above-target inflation against a worryingly strong currency, the need to keep the economy growing without overheating, and the bank's own credibility with a skeptical market.

Brazil is among big emerging economies such as India trying to balance a fight against inflation with concern about attracting hot capital flows.

The dilemma is being played out across Latin America as governments try to gauge how to balance rising consumer prices with firming currencies.

In Tombini's first meeting as head of the bank in January, policymakers raised the Selic to 11.25 percent from 10.75 percent, in line with expectations.

As recently as last week, economists unanimously predicted a 50-basis-point increase in the Selic rate to 11.75 percent. But with inflation expectations still edging up, four of 21 economists surveyed this week changed their forecasts to a 75-basis-point rise.

Many investors had priced in an increase to 12 percent, with yields on interest rate futures contracts rising further on Wednesday after unexpectedly strong industrial production data.

Hours before the bank's decision, data showed that industrial output expanded 0.2 percent in January from December. The median of 21 forecasts in a Reuters survey had seen production slipping 0.4 percent.

The central bank's biggest concern is inflation. At 6.08 percent, 12-month benchmark inflation through mid-February remains well above the bank's year-end target of 4.5 percent, plus or minus 2 percentage points.

Yet consumer prices in Sao Paulo, the country's largest city, slowed their advance in February from January, data showed on Wednesday. The FIPE inflation index is often seen as a bellwether for the benchmark rate.

Significantly, food prices, a key driver of inflation in recent months, receded in Sao Paulo. Higher food costs around the world have stoked fears of speeding inflation in a number of countries recently.

Still, the inflation outlook remains foggy, in part because of a recent jump in global petroleum prices on unrest in the Middle East and North Africa.

© 2017 Thomson/Reuters. All rights reserved.

 
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Brazil raised interest rates for the second time in three months, opting for an increase in line with market expectations despite mounting concerns about the pace of inflation. Central bank policymakers voted unanimously to lift the benchmark Selic rate to 11.75 percent...
Brazil,Hikes,Key,Rate,Inflation,Threat,Looms
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2011-27-03
Thursday, 03 Mar 2011 07:27 AM
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