Wednesday, January 15, 2014

Brazil raises Selic rate by 50 bps, 7th rate rise in a row

    Brazil's central bank raised its benchmark Selic rate by 50 basis points to 10.50 percent, saying in a brief statement that it was "continuing the adjustment of the basic interest rate process, initiated in April 2013."
    The Central Bank of Brazil said the decision by its policy committee, known as Copom, was unanimous and no bias was indicated.
    The statement was similar to the central bank's last statement in November when the bank omitted earlier references to its decision contributing to lower inflation and ensuring that this trend would persist. The omission fueled speculation that the central bank may be getting close to ending its cycle of  policy tightening that began in April last year.
    Since April 2013, the central bank has raised its benchmark rate seven times in a row by a total of 325 basis points.
    Financial markets had widely expected the central bank to raise rates today following higher-than-expected inflation in December. Most economists had expected the central bank to raise its rate by 25 basis points but many had also looked for a 50 basis points increase.

    Brazil's inflation rate rose to 5.91 percent in December, up from November's 5.77 percent, and above 2012's 5.84 percent despite the central bank's seven rate rises.
    It was the fourth year in a row that the inflation rate exceeded the central bank's midpoint target of 4.5 percent. But Alexandre Tombini, governor of the central bank, said on Jan. 10 that inflation still remained within the bank's tolerance range of 2.5 - 6.5 percent and the high inflation rate was due to the decline in the real currency, labor market costs and price pressures in the transport sector.
    Economists expect inflation to remain high this year, around 6 percent.
    Brazil's real fell by 13 percent against the U.S. dollar in 2013, with most of the decline from May through August as global investors realigned their portfolios away from major emerging markets and towards advanced economies. Earlier today the real was trading at 2.36 to the dollar, steady since the end of 2013 and down from 2.05 end-2012.
    The rate rise comes at an awkward time as Brazil's economy is slowing. Gross Domestic Product contracted by 0.5 percent in the third quarter from the second quarter for annual growth of 2.2 percent, down from a rate of 3.3 percent in the second quarter.




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