Thursday, 20 January 2011

Brazil's Central Bank ups key interest rate to 11.25 per cent

Brazil's Central Bank has upped its key interest rate from 10.75 per cent to 11.25 per cent in a bid to stabilise inflation. The committee meeting was headed by the newly appointed Central Bank president, Alexandre Tombini, who assumed office on 1st January. Tombini replaced his one-time mentor Henrique Meirelles who had been in the post a record breaking eight years, the longest term since the Bank opened in 1964.

Shortly after the meeting, the committee warned that the increase in the interest rate was likely to mark a new phase of monetary tightening to combat inflation amid steady economic growth. Inflation stood at 5.91 per cent in 2010, and is expected to drop below 5 per cent in 2011.

The committee said it sought a rate hike, "as the start of a process of adjustment to the base interest rate", and added that the Bank was going to monitor inflation very closely under the monetary tightening initiative and the expected governmental budgetary cuts.

Brazil's economy grew by more than 7 per cent in 2010 and is estimated to grow between 4.5-5 per cent in 2010. Inflation has been one of the key worries for Brazil in recent months. Its inflation target for 2011 is 4.5 per cent, meaning the Bank has its work cut out if it intends to reach the target figure.

The surge in inflation has been attributed to soaring food prices, but also to increasingly high consumer demand. Retail sales in November 2010 rose by 1.1 per cent from the previous month of the same year, and 9.9 per cent from November 2009.

Higher interest rates have a tendency to attract short-term foreign investment, but they can also hurt economic growth and exports. A rise in the appreciation of the Brazilian Real of more than 30 per cent against the dollar, since 2009, has been detrimental to domestic manufacturers due to fierce competition from cheaper imported goods.

Sources: BBC News, Wall Street Journal, FT, Reuters, Bloomberg

For more news and expert analysis about Brazil, please see Brazil Focus.

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