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Brazil's Central Bank Raises Base Rate as Inflation Looms

By GERALD JEFFRIS and TOM MURPHY

BRASÍLIA—Brazil's central bank Wednesday raised its base interest rate for the first time in nearly two years, but economists say the modest increase could be only the beginning of a longer tightening cycle to combat 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 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.

Brazilian inflation is currently running at 6.59%, which is above the ceiling of the country's 2.5%-to-6.5% target inflation 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%.

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

The latest rate decision was widely anticipated by economists, 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. Interest-rate-futures markets, however, had pointed to a higher 0.50 percentage point increase on Wednesday.

"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."

Ordinary Brazilians are beginning to feel the heat from higher prices. "My money is buying less than it used to," said Margareth Soares, a Brasília 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 from economists and politicians 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 São Paulo consulting group PTX Lending. "The base rate, under this administration, will never rise to the necessary level."

According to a Barclays BARC.LN -2.14% economic model, it would take a series of rate increases, 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. "Even buying from producers, I'm spending more than I used to," said Joelma Lacerda, a Brasília restaurant owner. "I haven't raised my prices yet, but I'll have to in the next few days."

Officials have countered the 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 increases may not be enough to pull inflation down, and keep it down. "Consumers are mostly using credit cards for purchases," said Mr. Dana. "Interest rates charged by credit cards are sky high, but that isn't deterring consumer demand."

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

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 Street Journal - http://online.wsj.com/news/articles/SB10001424127887323309604578429470230144226

Last Updated on Monday, 17 March 2014 11:01

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