Wednesday, March 2, 2011

Soaring Inflation: Brazil Set To Raise Rates Again by 0.50%, To 11.75% Or 12%

The Brazilian Central Bank is widely believed to be raising the benchmark interest rate (Selic) by 0.50 percentage points at the meeting of the Monetary Policy Committee that ends tonight. Most analysts, however, believe that the Fed is wrong. For them, the monetary authorities should be even tougher in fighting inflation!

Brazilian rates are fueling a run on its currency as investors flee the near zero paying US dollar investments.

Therefore, any surprise in the decision, such as a raise of 0.75% to 12% a year will actually be welcome. The main argument is that inflation expectations are worsening continuously, which feeds into higher prices. This pessimism indicates that the market is wary of the ability to control inflation.

In a Focus newsletter, the forecast for the IPCA in 2011 worsened for 12 straight weeks. The IPCA is the official inflation rate. The government has set 4.5% as the target for 2011 and 2012, with a tolerance of two points down or up. Last year, the IPCA popped through the center of the target (5.91%). For 2011, the projection is 5.80%. For 2012, 4.78%.

The estimate for next year is what bothers most analysts. "It is unprecedented an expectation out of the center of the goal so early," said economist JGP Resource Management Fernando Rocha (O Estado de Sao Paulo).

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