Brazil Puts a Brake on Interest Cuts. Key Rate Left at High 11.25%

São Paulo's Brazil Mercantile and Futures Exchange Putting an end to a monetary policy distention which begun over two years ago, the Brazilian Central Bank left this week the benchmark interest rate, Selic, unchanged at 11.25%. According to the Copom, Brazil's Monetary Policy Committee, the decision "to take a pause in the monetary policy flexibilization process was unanimous" following the analysis of "available macroeconomic data."

The decision puts an end to 18 consecutive interest rate cuts begun on September 2005, which brought the Selic down by 8.5 percentage points. Inflation rates in Brazil have been in line with the Central Bank targets in the range of 4/5% annually.

"The Central Bank's caution can be explained by the uncertainty about the international scenario and mid-term inflation", said Roberto Padovani, chief economist from West LB Bank Brazil.

However a number of analysts were expecting a further skim of 0.25 percentage point from the latest meeting of the Copom.

"In growth terms the cost of the decision is low and gives the Central Bank more time to gather data and assess inflationary risks", added Padovani.

Besides the potential mid-term impact of the US financial crisis and international currencies turmoil caused by the plunging US dollar, the Brazilian central bank apparently also took into account the fact that retail sales in Brazil expanded 0.7% last August compared to July, for the eighth month running.

The latest report from the IBGE (Brazilian Institute of Geography and Statistics) showed that clothing, electric appliances and furniture were among the most active items. Compared to the same month a year ago the retail sales increase was 9.9%.

"Retailing is doing very well and has nothing to complain. We can only hope that retailing continues to be the strong boost for industry," said economist Otávio Aidar from Rosenberg & Associates.

The Central Bank monetary committee is scheduled to meet again December 4 and 5.

Mercopress

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