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It’s 13.75%: For Fourth Time in a Row Brazil Raises Key Interest Rate

Brazil Selic Brazil's Copom (Monetary Policy Committee) of the Brazilian Central Bank (BC) raised Brazil's base interest rate, the Selic, by 0.75 percentage point, from 13% to 13.75% a year. This is the fourth consecutive hike in Selic and the highest in almost two years.

The Copom vote apparently was 5-3. Dissenters favored a 0.50 percentage points increase. In a statement the Central Bank said it was raising rates "to promote the conversion of the inflation to the target trajectory in a timely fashion."

Even with falling commodity prices that pushed inflation lower in August to 6.17% from a three-year high of 6.37%, the orthodox central bank seems intent in insuring demand growth does not outpace supply and keeps to the original inflation target of 4.5% for 2008. Concerns were heightened when earlier data showed the economy expanded at 6.1% in the second quarter.

The Copom after raising the Selic rate by a larger-than-expected 0.75 percentage point in the previous meeting July 23 used the same language to express their goal of bringing inflation back to its target in a "timely fashion."

A central bank survey of 100 economists anticipates the Selic rate will further increase to 14.75% by the end of the year.

The Brazilian central bank started to raise the Selic rate at the April meeting after holding it unchanged for six months at a record low of 11.25%. Policy makers had increased the rate by half a percentage point twice before accelerating the pace in July. The rate now stands at the level it was in November 2006.

Even before the Selic hike was announced, Paulo Skaf, the president of the São Paulo State Industries Federation (FIESP) had warned that any increase in the key interest rate would be for "pure vanity," so the Central Bank wouldn't have to admit that the July hike was a mistake.

"The Selic hike was a mistake since the inflation we were seeing was from food and was international. If the interest rates are hike today that will be for pure vanity. There is no reason for that, because the previous increase was good only to raise the interests of our debt."

Mercopress/Bzz

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  • Show Comments (5)

  • Dona

    The Real
    It might kill any sort of interest rate, however it doesn’t help GDP in the economy because it makes it more difficult for companies and banks to find the investments that they need. So in turn it is a bad thing as well.

  • AUGUSTUS

    Certainly ch-c will add his views
    I am certain that ch-c will provide the necessary details, explaining the illusion provided by these high interest rates…

  • AUGUSTUS

    Previous entry incomplete
    As already clarified by ch-c, the brilliant (nasty) Swiss blogger (and a frequent critic of Latin American economies), unless Brazil maintains extremely high interest rates, the vicious cycle of hyper inflation which has frequently plagued the inefficient Brazilian economy (largely due to exceedingly high levels of political corruption and favoritism in Brasilia), will return in full swing… With hyper inflation, the ephemeral, apparent advances which are frequently boasted by several editorials in this blog, would be rapidily replaced to the traditional cycles of BOOM/BUST which have historically afflicted the Brazilian consumer and prevented the nation to ascend into a healthy economic environment where true, actual prosperity may emergeÀ¢€¦

  • AUGUSTUS

    Increased interest rate – the sad truth
    As already clarified by ch-c, the brilliant (nasty) Swiss blogger (and a frequent critic of Latin American economies), unless Brazil maintains extremely high interest rates, the vicious cycle of hyper inflation which has frequently plagued the inefficient Brazilian economy (largely due to exceedingly high levels of political corruption and favoritism in Brasilia).

  • AES

    The increased interest rate strengthens the value of the Real, or at least controls not only its value, but the perception of its value. Markets are about perception. The weakening of the Real will increase commodity exports, increased commodity exports will increase trade balance and increase the value of commodity producers and by consequence the value of Bovespa. The conservative money policy encourages European, Asian and North American investment. The cheaper Real allows countries like China that are holding billions of dollars to continue expansion even though their own exports have decreased and their economy has contracted from 12% to 9%.

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