Wednesday, May 28, 2014

Brazil maintains Selic rate at 11.0 pct after 9 raises

    Brazil's central bank maintained its benchmark Selic rate at 11.0 percent, as widely expected, ending its monetary tightening cycle after nine rate rises that started in April 2013.
    The Central Bank of Brazil said in a brief statement that its policy committee, known as Copom, had unanimously agreed on keeping the rate steady at this time in light of the macroeconomic scenario and the outlook for inflation. Copom did not indicate a bias.
    The central bank has raised its rate by a total of 375 basis points since last April, including 100 points this year. 
    In April the central bank signaled that it was getting closer to freezing the rate as it changed its guidance to say that it would monitor the economic scenario and this would define its next step. In February and January the bank had said the rate rises were a continuation of an adjustment of the interest rate process that had begun in April last year.
    In addition, central bank officials, including President Alexandre Tombini, had on several occasions recently said the past interest rate rises were having a delayed effect on inflation and inflation would start to slow in coming months.
    Brazil's inflation rate rose to 6.28 percent in April from 6.15 percent in March with consumer prices in recent months driven up by the impact of drought in Southern Brazil that cut the harvest.
    But a slowdown in inflation in mid-April and an appreciation of Brazil's real currency in recent months has apparently given the central bank enough reason to halt its rate rises.
    In addition to comments by the central bank and the dampening impact of a higher real on import prices and thus inflation, economists had expected the central bank to maintain rates this month in light of the presidential elections in October.
    The most recent inflation index, the IPCA-15, rose 0.58 percent through mid-May compared with 0.78 percent in the month through mid-April.
    The central bank targets inflation of 4.5 percent, plus/minus 2 percentage points and in March it raised its 2014 forecast to 6.1 percent from 5.6 percent due to the impact of the drought.
    Economists expect inflation to get another push upward in June and July due to higher prices for airfare, hotel rooms and restaurant meals in connection with the World Cup soccer tournament.
    The central bank also raised its 2015 inflation forecast to 5.5 percent from 5.4 percent. The last time inflation hit the central bank's midpoint target was in August 2010.
    Brazil's real was caught up in the general volatility in financial markets in the summer of 2013 when the U.S. Federal Reserve signaled it was getting ready to reduce its asset purchases.
    The real lost just over 13 percent last year, but since February it has strengthened as investors' appetite for emerging markets has returned. The real was trading around 2.24 to the U.S.dollar today, up 5 percent since the beginning of 2014.
    Brazil's economy remains sluggish with Gross Domestic Product in the fourth quarter of 2013 up by 0.7 percent for annual growth of 1.9 percent, down from 2.2 percent in the third quarter.
    Economists expect first quarter GDP growth of only 0.2 percent and the central bank has forecast growth this year of 2.0 percent, down from 2013's 2.3 percent.
    The International Monetary Fund in April cut its 2014 growth forecast for Brazil to 1.8 percent from a previous 2.6 percent and its 2015 forecast to 2.7 percent from 2.9 percent.


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