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."