Wednesday, February 26, 2014

Brazil raises rate by 25 bps, 8th increase since April 2013

    Brazil's central bank raised its benchmark Selic rate by 25 basis points to 10.75 percent, saying it was "continuing the adjustment of the basic interest rate process, initiated in the April 2013 meeting."
    The Central Bank of Brazil, which has now raised its rate by 350 basis points since last April, said the decision by its policy committee, known as Copom, was unanimous and without bias.
    The central bank's statement was similar to the statements it issued in January and November 2013.
    Brazil's central bank embarked on its current tightening cycle last April when it raised the Selic rate by 25 basis points to 7.50 percent. Starting in May the central bank has raised its rate in 50-basis-point increments six times but it was expected to reduce the size of the rate rises today in light of the slowdown in inflation and a stabilization in the real currency.
    Brazil's inflation rate eased to 5.59 percent in January, continuing the gradual decline since hitting a high of 6.7 percent in June 2013. The central bank targets inflation in a range of 2.5 to 6.5 percent, with a midpoint of 4.5 percent. Inflation has exceeded the bank's midpoint in the last four years.
    A decline in Brazil's real currency, which raises import prices, has complicated the central bank's fight to push down inflation. In 2013 the real depreciated by 13 percent against the U.S. dollar as it was caught up in the general outflow of capital from emerging markets toward advanced economies following the U.S. Federal Reserve's preparations for reducing asset purchases.
    After dropping in January, as part of a general bout of weakness in emerging markets' currencies and volatility in global financial markets, the real has strengthened this month as calm has returned to markets and was trading at 2.35 to the U.S. dollar today, marginally up from 2.36 at the end of 2013.
    Brazil's government has also been increasing its spending in recent years, fueling inflation. But last week the finance minister, Guido Mantega, said he had not ruled out raising taxes this year to pay for any extraordinary spending and budget cuts were aimed at fiscal consolidation to help lower inflation and support sustained GDP growth.
    Brazil's economy has lost steam in the last three years with its Gross Domestic Product contracting by 0.5 percent in the third quarter of 2013 from the second quarter for annual growth of 2.2 percent, down from 3.3 percent in the second quarter.
    Fourth quarter and 2013 GDP data are due tomorrow, Thursday. The central bank has forecast 2013 growth of 2.3 percent.
    A central bank survey earlier this week showed that economists had trimmed their growth forecasts for 2014 to 1.7 percent, down from last week's forecast of 1.8 percent. Mantega, however, estimates growth this year of 2.5 percent.


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