Brazil: Shady practices won’t mitigate the heat of inflation

Rob Dwyer
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With Brazilian inflation now above the target rate, in mid-April the central bank announced a rise in interest rates for the first time since July 2011. But the move, in the face of stubborn and diffuse pressure (over 70% of the country’s inflation basket is now affected by inflation) was dovish – just a 25 basis point increase in the face of the market expectations of 50bp. The minutes from the central bank’s monetary policy committee meeting also showed that two of the eight members voted against any rise.

Some economists read into this a likelihood that the monetary tightening will be quick and shallow. Capital Economics says: "The decision by Brazil’s central bank to raise interest rates by 25bp – as opposed to the 50bp that was priced into the market – suggests that the tightening cycle is likely to be less aggressive than many...