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Brazil Interest Rate Hike May Be Only The Beginning

By Gerald Jeffris and Tom Murphy

BRASILIA--Brazil's embattled central bank Wednesday raised its base interest rate for the first time in 22 months but the modest hike could be only the beginning in a long, tightening cycle to combat fierce inflation.

The central bank's monetary policy committee voted to raise its Selic base interest rate a quarter point to 7.5%. Six members voted for the increase while two cast ballots for keeping the rate stable.

In a statement, the committee sounded an ambivalent note. It said that, on the one hand, it recognized that "the elevated level of inflation" made at least some action necessary. However, on the other hand, the committee continued to fret about "internal and, primarily, external uncertainties" that are holding back Brazilian economic growth.

The hike was the first by the central bank since July of 2011, when it raised the rate to 12.50% from 12.25%.

The latest rate decision was widely anticipated by financial market participants, who indicated that the bank would need to begin raising rates this month, or next month at the latest, in an effort to counter mounting inflationary pressures.

"The government had already signaled that it would raise the Selic rate in an effort to counter inflation," said Samy Dana, a Getulio Vargas Foundation economist. "The government needs to put a stop to unfettered consumer credit."

Brazilian inflation is currently running at a worrisome 6.59%, which is above the ceiling of the country's 2.5%-to-6.5% inflation targeting range. The 12-month inflation rate has been creeping higher since the beginning of the year, led by stubborn food and fuel prices. Inflation ended 2012 at 5.84%.

Ordinary Brazilians are beginning to feel the heat from higher prices.

"My money is buying less than it used to," said Margareth Soares, a Brasilia homemaker. "With the same amount of money, I bought 20% or 30% less at the supermarket today than I did last month."

In recent weeks, the central bank endured sharp criticism for allowing inflation to inch beyond the target range while holding its base interest rate steady at meetings in January and March.

"Inflation has a will of its own," said Paulo Faria-Tavares, managing partner of Sao Paulo consulting group PTX Lending. "The base rate, under this administration, will never rise to the necessary level."

According to a Barclays economic model, it would take a series of hikes, elevating the Selic base rate two full percentage points to 9.25%, to pull inflation down to the government's preferred level of 4.5%. And even then, it would take 18 months to reach the goal.

Ordinary Brazilians may not want to wait that long. Said Joelma Lacerda, a Brasilia restaurant owner, "Even buying from producers, I'm spending more than I used to. I haven't raised my prices yet, but I'll have to in the next few days."

To be sure, officials have countered the often stinging critique by professing their commitment to the inflation-targeting program, originally instituted in 1999 as a way to guarantee credibility for government economic management.

"The central bank has said that there is no tolerance for inflation and I can assure you there will be no tolerance for it," said Central Bank President Alexandre Tombini at a meeting of South American central bank officials in Rio de Janeiro last week.

But even a series of interest rate hikes may not be enough to pull inflation down, and keep it down. "Consumers are mostly using credit cards for purchases," said Professor Dana. "Interest rates charged by credit cards are sky high but that isn't detering consumer demand."

As often occurs with monetary policy, Brazil's central bank gets slammed by critics from both sides.

In a brief statement Wednesday, the powerful Sao Paulo Federation of Industries called the interest rate hike "a mistake" that will retard job creation, investment and growth.

Brazil's economy expanded by just 0.9% in 2012 after disappointing growth of 2.7% the previous year. Most economists are forecasting growth of about 3.0% in 2013 but only if exports pick up and both consumer and business confidence remain firm.


-Paulo Trevisani contributed to this article.


Write to Gerald Jeffris at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and Tom Murphy at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Source: The Wall Stret Journal -

Last Updated on Monday, 17 March 2014 11:02


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