Brazil: balancing the books

After a series of 18 consecutive rate cuts, the Brazilian Central Bank has held its benchmark Selic rate at 11.25% at its last four meetings.  Yet a rise is on the cards when it meets on Tuesday, despite government pressure to avoid new rate hikes. 

The minutes of the March 4-5 meeting indicate that the Monetary Policy Committee chewed over a rise last month for the first time, and the news that Brazil's consumer prices rose more than expected last month, pushing the annual rate to 4.7% -- above the central bank's target of 4.5% -- may well force the decision this time. 

The goal would be primarily to reduce medium-term inflation expectations in the market, rather than to effect downward pressure on inflation -- price rises are being driven mainly by food costs, which are not influenced by interest rates.  However, the Bank is surely aware of the negative impact of such a move, which could check economic growth, attract short-term capital and further strengthen the currency to the detriment of competitiveness.  This may well encourage a small rate rise, to 11.5%, although more increases may follow later this year if inflation refuses to fall.