Thursday, 11 December 2008

Brazil's Central Bank Signals Rate Reduction Soon

Yesterday, Brazil's central bank (BCB) kept its benchmark overnight interest rate unchanged at 13.75 percent. The decision was followed by an avalanche of criticism by trade unions and business groups, which allege that high borrowing costs in Brazil (a recent study by the BCB showed that Brazil had the world's biggest credit spreads, followed by Colombia) are inhibiting economic activity and will only make the country hostage to the current global recession. Hours before, the goverment said that the Brazilian economy grew almost 7 percent in the third quarter, when the impact of the crisis hadn't been felt entirely. 

The decision was right. One former central banker told me last night, minutes after the decision, that he believed the central bank looked outside Brazil to take the decision. Russia, another BRIC country like Brazil, has wasted almost a third of its international reserves trying to stem its currency against speculative attacks. Almost every single EM country has had to intervene in the currency market to avert a drop in their currencies. Credit to the riskier sovereign governments is disappearing. While the inflation picture in Brazil is far from rosy, it is likely that the BCB saw the size of the current account deficit for 2009 -- and how to finance it -- as the problem, the source said. The global slowdown will probably hamper Brazilian exports. And the BCB doesn't want to repeat its actions of 2002, when it had to provide companies with trade financing after it dried up. Inflation will eventually come down, the source told me, and such drop will open leeway for a rate cut, maybe in March. 

In the meantime, let's leave trade union leaders and entrepreneurs balking at the BCB for being prudent. There was certainly intense debating inside the bank's Copom (which stands for the BCB's Monetary Policy Committee.) Directors spent almost four hours deciding what to do with the Selic rate (the longest meeting in more than two years!) 

Brazil is faring better than many countries during this crisis. But it doesn't make the country's policymakers immune to mistakes. The crisis has shown that markets are applauding those who are imprudent with the use of taxpayers' funds to fight it, and those who have yielded to prudence have been punished. Let's hope the Brazilians can set a different example. 

1 comment:

  1. Dear Memo, nice initiative! We humans (non-financial slaves) have some hard time to keep updated on the latest financial analysis and I am sure that this tool will help us on the run!

    Godspeed my friend!