Wednesday, July 29, 2015

Brazil raises rate 50 bps,signals pause in tightening cycle

    Brazil's central bank raised its benchmark Selic rate by another 50 basis points to 14.25 percent, but signaled that it will pause in its tightening campaign by saying that it will be necessary to maintain the rate at this level for a "sufficiently long period" in order for inflation to converge toward its target by the end of 2016.
    The Central Bank of Brazil has now raised its Selic rate by 250 basis points this year and by 700 points since embarking on its current monetary tightening cycle in April 2014 in an effort to bring inflation down to its target of 4.5 percent, plus/minus 2 percentage points.
   The central bank's monetary policy committee, known as Copom, was unanimous in its decision.
   The Selic rate is now at its highest level since September 2006 as inflation in June rose to 8.89 percent from May's 8.47 percent, reaching the highest annual rate since December 2003 when the Selic rate was 16.50 percent.
    Brazil's Gross Domestic Product shrank by 0.2 percent in the first quarter of 2015 from the final quarter of last year for annual decline of 1.6 percent, the fourth consecutive quarter of a contraction of economic output.
   The real has been falling since July 2011, when it was trading around 1.55 to the U.S. dollar, and has now depreciated to 3.33, a fall of 53 percent. Since the beginning of this year it has fallen 20 percent.
    While today's rate hike was widely expected, the central bank has recently signaled that it was close to ending its tightening campaign as inflationary expectations have come down.



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