Tags: Brazil Hikes Key Interest Rate to 11.25 Percent in Effort to Halt Inflation

Brazil Hikes Key Interest Rate to 11.25 Percent in Effort to Halt Inflation

Thursday, 20 Jan 2011 06:59 AM

Brazil's central bank raised interest rates Wednesday for the first time since July to curb rising prices, starting a potentially risky tightening cycle for one of the world's fastest-growing economies.

The bank's monetary policy committee, known as Copom, unanimously raised the benchmark Selic rate to 11.25 percent from 10.75 percent, as predicted by all 21 economists in a Reuters poll.

The rate hike was the first under President Dilma Rousseff and central bank chief Alexandre Tombini. Both took office this month and are under pressure to show investors they can take tough steps to curb inflation running at a six-year high.

The bank said in a statement the rate move signaled the beginning of a cycle of adjustments to the Selic. It added that it will also rely on so-called "macroprudential measures" -- tools such as bank reserve requirements that can dampen credit without raising rates. For the complete text of the statement, see

The bank's challenge going forward will be to rein in prices while avoiding further appreciation of the real currency or excessive damage to an economy that is expected to slow its pace of expansion in 2011.

"I think that this is going to be a bumpy process. This is a monetary policy path that has to weigh non-interest rate factors," said Gray Newman, Latin America chief economist, at Morgan Stanley.

"The mix between interest rates and macro-prudential measures, I don't think we know that yet," he added.

Rapidly growing emerging markets, such as China and Chile, have started tightening monetary policy on a pickup in consumer prices, particularly volatile food prices. In contrast, many larger economies have kept their interest rates near zero to try to boost growth.

Brazil's steep interest rates, among the world's highest, have helped draw in foreign investors eager for better yields than those on offer in many still-struggling developed economies in recent years.

The wave of inflows, in turn, has boosted the country's currency, fueling a rally that has left exporters struggling and industry sluggish despite the country's economic growth.

TOUGH TASKS AHEAD

The Rousseff administration has pledged to do its part to contain inflationary pressures, promising substantial budget cuts that it hopes will help cool the economy and pave the way for lower interest rates down the line.

That policy mix should help cool red-hot consumer demand and rein in inflation, which is running well above the center of the central bank's target.

Brazil's central bank kept interest rates on hold in the last three policy meetings under Tombini's predecessor, Henrique Meirelles, despite an alarming surge in consumer prices that pushed inflation to a six-year high in 2010.

Finance Minister Guido Mantega has publicly downplayed the inflation risks, creating a perception among some analysts that Tombini is under pressure to be restrained in monetary tightening to keep credit flowing.

Inflation reached 5.91 percent last year, overshooting the center of the government's target range of 4.5 percent plus or minus 2 percentage points. With food prices climbing around the world, the inflation outlook remains grim.

Analysts raised their forecast for 2011 inflation in Brazil for the sixth straight time in the most recent weekly central bank survey to 5.42 percent, well above the center of this year's target range, which is the same as last year's.

The rate hike, especially if it is followed by more increases later this year as the central bank suggested in its statement, would also restrain a boom in consumer credit, which is at the heart of Brazil's recent prosperity.

Brazil's economy, Latin America's largest, likely grew more than 7 percent in 2010 and is expected to grow between 4.5 and 5 percent this year.

© 2017 Thomson/Reuters. All rights reserved.

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Brazil's central bank raised interest rates Wednesday for the first time since July to curb rising prices, starting a potentially risky tightening cycle for one of the world's fastest-growing economies. The bank's monetary policy committee, known as Copom, unanimously...
Brazil Hikes Key Interest Rate to 11.25 Percent in Effort to Halt Inflation
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