Brazilian Central Bank Increases Interest Rates Third Consecutive Time

07/11/2013 - 08h28

In another step to combat high inflation, yesterday the Brazilian Central Bank raised interest rates for the third time in a row, this time by 0.50%, taking the benchmark Selic rate to 8.5% per year.

COPOM, the Monetary Policy Committee of the Central Bank, in a unanimous decision, kept the same open intensity demonstrated at the previous meeting in May. But unlike the last decision, which came out higher than expected, this was entirely within the market's expectation.

For the former director of the Central Bank, Carlos Thadeu de Freitas, the bank's next steps will depend on the behavior of the dollar. If the value of the currency returns to R$2.10 or thereabouts, he believes that just one more increase of half a percentage point will be sufficient to reduce inflation. But if the dollar continues to rise, Freitas says the rate could reach 10%.

According to the Focus newsletter published weekly, the majority of over a hundred institutions consulted by the CB are betting on two more hikes in the rates, bringing the Selic to 9.25%.

However, the number of economists who project a higher rate has been increasing. They expect further increases in interest rates because, while monthly inflation is weaker, the cumulative rate for 12 months is 6.7%, well above the goals of the CB.

The official target is 4.5%, with a maximum limit of up to 6.5%. The promise of the President of the CB, Alexander Tombini, is to deliver inflation this year below last year's index (5.84%) and that of 2014 below 5%.

To help control inflation, the Finance Ministry has pledged to cut spending and create a public sector primary surplus of 2.3% of GDP this year. The market, however, continues to be skeptical and projects a surplus of only 1.7% of GDP.

Translated by DAVE WOLIN

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