Wednesday, March 2, 2016

Brazil leaves rate steady despite inflation at 12-year high

   Brazil's central bank left its benchmark Selic interest rate steady at 14.25 percent, as expected by most economists, despite inflation hitting a 12-year high in January.
    The Central Bank of Brazil's policy committee voted by six votes to two to maintain the rate, with Copom members Sidnei Correa Marques and Tony Volvon once again voting to raise the rate by 50 basis points, the same as in January when the central bank surprised markets by keeping the rate steady. Marques and Volvon also voted to raise the rate in November 2015.
    As on Jan. 20, the central bank's statement today referred to the prospects for inflation and the rise in domestic and especially external uncertainties in explaining its decision.
    The central bank halted its tightening campaign in July last year after raising the Selic rate by 700 basis points since April 2013 in an effort to force inflation down to its midpoint target of 4.50 percent, within a range of 2.50 percent to 6.50 percent by late 2016.
    But inflation has continued to accelerate since then and hit a higher-than-expected 10.71 percent in January, up from 10.67 percent in December, and is expected to rise further in February according to data for prices to mid-February that showed inflation rising to 10.8 percent.
   The rise in inflation comes as Brazil's economy continues to shrink and last month Alexandre Tombini, central bank governor, said inflationary pressures didn't allow the central bank to cut rates.
    Brazil's Gross Domestic Product shrank by an annual 4.5 percent in the third quarter of last year, the sixth consecutive quarter of contraction on an annual basis, and is estimated to have dropped by 3.7 percent for the full year.
    With the economy slumping, analysts last week lowered their forecasts for inflation this year to 7.57 percent, the first cut in nine weeks, and forecast that the central bank would cut its Selic rate to 12.5 percent by end-2017.
    Economists expect Brazil's economy to shrink by 3.45 percent this year.
    Brazil's real began depreciating in September 2014 and lost 33 percent against the U.S. dollar in 2015.
    This year it has been more stable and was trading at 3.89 to the dollar today, up 1.8 percent this year.


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