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Brazil’s Industry and Labor Unions Decry 11.75% Key Interest Rate

Brazilian currency, the real In Brazil, the Central Bank’s Monetary Policy Committee (Copom), for the second time this year, jacked up Brazil’s benchmark interest rate, known as the Selic, by 0.5 percentage point. This time it rose from 11.25% per year to 11.75%. Most market observers expected the 0.5 percentage point increase.

However, some thought the increase could have been 0.75 percentage points due to the very strong economic activity in the industrial sector as a whole, where output rose 2.5%, and especially in the automobile sector where February sales were up 23.06%.

On the other hand, the Getúlio Vargas Foundation released inflation data showing that in seven of the country’s largest metropolitan regions prices rose only 0.49% in the last week of February, compared to an increase of 0.61% in the previous week, which was seen as a sign that inflation is running out of steam.

The problem is that at the moment, most market forecasts and economic indicators have inflation at an annual rate above 5.5%. The government’s official inflation target for 2011 is 4.5%, plus or minus two percentage points.

The next Copom meeting (they take place every 45 days) is scheduled for the 19th and 20th of April.

The Industrial Federation of São Paulo (Fiesp) called the decision by the Central Bank to raise the Selic, by 0.5 percentage point, “exaggerated.”

Commenting on the fact that this is the second 0.5 percentage point increase this year, the Fiesp president, Paulo Skaf, declared: “The impact of this interest rate elevation cycle will sharply brake our economic activity in the near future.”

Spokespersons for the National Confederation of Workers in the Financial Sector (Confederação Nacional dos Trabalhadores do Ramo Financeiro – Contraf), which is associated with Brazil’s largest labor union, the CUT – Central Única dos Trabalhadores, came down hard on the decision by the Central Bank’s Monetary Policy Committee – Copom to raise interest rates:

“There is no technical basis to justify this increase,” declared a note from the union.

According to Contraf, differing sharply in their opinion from that of the Copom, inflationary pressure over the last few months has been due to “…rising prices of certain farm commodities, with no signs that those price increases have been due to any increase in demand.”

In a note, the labor union Força Sindical also criticized the decision.

“Once again, by raising the Selic, the government bows to the interests of speculative capital in a clear demonstration of the conservative spirit that continues at the helm of national monetary policy,” said the note.

Força Sindical went on to call the decision senseless in light of signs that the economy is cooling off. The note went on to lament that along with other recent measures announced by the government, such as budget cuts and a new minimum wage (much lower than labor unions wanted), economy policy was “…moving in a direction contrary to the national desire for economic development with just income distribution.”

The Rio de Janeiro Industrial Federation (Firjan) was critical too of the interest rates increase.

“With this new increase in the basic interest rate, it is evident that without effective fiscal policy this cycle of ever-tightening monetary policy will have a high cost to the country in terms of long term financing, production and job creation,” said a Firjan note.

Firjan went on to say that even the 50 billion reais budget cut announced by the government will be insufficient. “The moment demands a true fiscal adjustment, free of accounting tricks, which effectively reduces the pressure exerted by government spending on demand,” declared the Firjan note.

Firjan emphasized the need for “persistent” control of government accounts, “…based on a detailed multiyear fiscal plan that is both transparent and easy to understand.”

The Rio industrial federation concluded by stating that a high level of growth with inflation under control would only be possible if the Firjan suggestions were implemented.

ABr

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