Brazil Hikes Key Interest Rates to 12% in Attempt to Halt Over 6% Inflation

The Brazilian realIn a decision that surprised the market, which expecting a bigger hike, Brazil’s central bank raised its benchmark interest rates, the Selic, a quarter of a percentage point from 11.75% to 12%. This was a smaller raise than two previous hikes of half a percentage point earlier this year.

The Central bank release said that “following the process of adjustment of monetary conditions, the Copom decided to raise the Selic rate to 12% a year, without a bias, with five votes in favor, and two votes asking for a 0.5 percentage point increase.

“Taking into account the balance of inflation risks, the still uncertain rhythm of the moderation of domestic activity, as well as the complexity of the international environment, the committee understands that, at the moment, the implementation of adjustment in monetary conditions for a sufficiently long period is the most adequate strategy to guarantee the convergence of inflation to the target in 2012.”

Fast rising inflation, pushed in part by soaring global food and fuel prices, has put Brazil’s new central bank President Alexandre Tombini in the difficult predicament of seeking to balance the country’s need to fight price rises with a desire to avoid hampering Brazil’s extraordinary growth story by pushing rates even higher.

The dilemma is set against real questions about how effective local interest rates are in fighting inflation caused by global trends like soaring food and fuel prices.

What’s driving concern is that an already tricky inflation scenario worsened in recent days. Brazil said Wednesday that its benchmark inflation rate, which is broadly similar to the U.S. consumer price index, quickened to 6.44% – its fastest rate in more than two years. Meantime, central bank surveys say that inflation expectations among Brazilians are deteriorating.

And Brazil’s decision on how much to raise rates is complicated by its other big macro economic headache: An overvalued currency.

Like some other emerging market countries, Brazil is letting its currency appreciate in order to stem inflation. But the Brazilian Real has already soared around 40% since early 2009 as global investors pour money into the financial system to profit – at least in part – from Brazil’s high interest rates.

Brazilian businesses are grumbling that the strong currency is making them vulnerable to competition from countries with weaker currencies, particularly manufactured goods from China.

Mercopress

 

Tags:

You May Also Like

Brazilian Colorful Fashion Is a Hit Overseas

Brazilian colorful prints of dresses by brand Anunciação, in the midwestern state of Goiás, ...

Stampede Time

Investors have been pulling their money out of the Brazilian market at a frantic ...

Brazilian congress inquiry on the air blackout

Brazil’s Boeing Tragedy: Transcript Shows US Pilot Lost and Then Taking a Nap

Brazil's House Representative, Vic Pires Franco, believes he has evidence that places most of ...

Curitiba: The Real and the Fairy Tale

Curitiba has enjoyed an international reputation as Brazil’s point city for the twenty-first century. ...

Brazil’s Lula Promises No Stone Unturned in Corruption Probe

Brazilian President Luiz Inacio Lula da Silva promised Monday that in the fight against ...

Brazil Heading to Russia on a Business Trip

Vice president José Alencar leaves for Moscow today at the head of a mission ...

Brazil Starts Renegotiation of Its Oil Deals in Bolivia

Bolivia’s government has appointed directors to sit on the boards of five foreign energy ...

Brazil’s Economy Analysts Expecting Lower Inflation in 2006

There has been a small change in the market mood in Brazil regarding future inflation. ...

Brazil Among World’s Cheapest Places to Live In

In spite of the recent valorization of the real compared to the dollar, São ...

Petrobras Surplus 600% Bigger than Last Year’s

Together the greater supply of Brazilian oil for export, the reduction of spread (the ...