Central Bank of Brazil Increases the Benchmark Rate

The Central Bank of Brazil has decided to raise the benchmark interest rate for the 1st time since July, 2011. The policy makers are currently looking to slow down the inflation levels, which are otherwise having an adverse effect on the economic recovery of the Latin American country. President Alexandre Tombini, who leads the board of the Brazilian Central Bank, voted 6-2 for passing a motion which increased the Selic rate by 25 basis points to 7.50%. Investors correctly predicted an increase in the Selic rate from its earlier record low value.

An official statement was posted on the website of the Central Bank and it states that the high level in inflation and the resilience of the same required a proper response. Hence, the Brazilian Central Bank had to take this decision.

Incidentally, Brazil’s President, Dilma Rousseff, is facing a pressure for containing the consumer prices as in last March; the annual inflation of Brazil breached the target range of the Central Bank for the very first time since November, 2011. In last October, the policy makers decided to cut taxes on consumer goods and also lowered the Selic to 7.25%. Even after that, the prices continued to increase sapping the purchasing power and eroding demand as well. As far as reports are concerned, the retail sales of Brazil, for the month of February, declined for the 2nd time in the last 3 months.

According to the Chief Economist of ING Bank NV, Gustavo Rangel, inflation for Brazil has clearly become detrimental to the country’s growth. He added that not only the retail figures, but investor’s confidence also shows that inflation is currently a major concern for the country.

If swap rates on the contract to mature in July, 2013 are considered, it was unchanged at 7.63%. On the other hand, the major currency of the country, Real declined by 0.7% on today and is currently priced at 2.0006 per USD.

Brazil is the 2nd largest emerging market in the world and the annual inflation in the same increased to 6.59% in March, from its value of 6.31% in February. When it comes to other countries in the region, annualized March price increases for Chile and Mexico was of 1.5% and 4.25% respectively. The Central Bank of Brazil has a target inflation of 4.5%, plus or minus 2 percentage points.