Brazil: Will the Central Bank Continue to Tighten?

Posted March 3, 2011 by Editor

[private]Brazil’s central bank monetary council (Copom) increased its benchmark Selic-overnight rate 50 basis points, to 11.75%. A few hours later, the government’s statistics office released National Accounts data indicating annual real GDP growth of 5.0% during the fourth quarter of 2010.

The figures just released have a noticeable soft-landing look. They point to a consumer-driven expansion of real GDP in the 4.5%-to-5% range during the next few quarters—a pace which, from the perspective of the Copom, is not inflationary.

Still, upward inflationary pressures are entering Brazil’s economy via high commodity prices (offset significantly, however, by a strong and strengthening currency). This means that the central bank may still have some work to do on the inflation front, but perhaps not much more, especially in view of the apparent fiscal-restraint efforts also underway: another 50 basis points of further tightening is highly likely, nearly certain; 100 basis points are possible, but will depend on the evolution of inflation in the next few weeks and months.

3-3-11–EMG INDICATORS AND INSIGHTS _Brazil Monetary Policy and GDP_[/private]