Brazil cenbank's new rate policy called flexible
Reuters, Thursday, September 03, 1998 at 17:24
By Joelle Diderich
BRASILIA, Sept 3 (Reuters) - Brazil's central bank gave
itself more room to tweak interest rates in response to global
market turmoil by widening the space between the floor and the
ceiling for market rates, economists said on Thursday.
The Central Bank's Monetary Policy Committee (Copom) said
Wednesday it cut the prime lending rate to an annualized 19
percent from 19.75 percent, but it raised the basic assistance
rate to an annual 29.75 percent from 25.75 percent.
"The Central Bank has made its monetary policy more
flexible," said Pedro Thomazzoni, chief trader in derivatives
and capital markets at Lloyds Bank in Sao Paulo. "It has
increased its scope for intervening in the market."
Although analysts expected no immediate change in the
overnight rate, they said the Central Bank in theory could
intervene to make the rate fluctuate anywhere between 19
percent and 29.75 percent to cope with external shocks.
"If there is a problem restricting banking liquidity, for
instance dollar outflows increase or the crisis worsens, then
the overnight rate rises," explained Marcelo Allain, chief
economist at BMC Bank.
"Previously you would have had to hold a Copom meeting. Now
rates can rise 10 percent without any big problems," he added.
However, economists agreed hiking rates would be a
last-ditch measure to bolster Brazil's currency reserves and
protect the local currency, the real, from speculative attack.
The Central Bank had been widely expected to lower the
prime lending rate, despite pressure to attract foreign capital
amid a global rush out of emerging markets in the aftermath of
Russia's economic crisis.
But analysts noted that by increasing the basic assistance
rate, the central bank raised the ceiling for the overnight
rate, used locally as an indicator of the effective level of
official rates.
The Central Bank has been testing the market with daily
interventions in the open market, which in recent months have
replaced the Copom meetings as a focus for traders and
investors seeking an indication of future Brazilian rates.
In the daily auctions, called "go-around", the Central Bank
has set an unspecified number of overnight repurchase
agreements paying a rate below the current prime lending rate
to drain liquidity from the market.
The Central Bank on Monday agreed to pay an overnight call
money rate of 19 percent a year for the securities. But it has
failed to hold a "go-around" since, in an indication it wishes
to hold the overnight rate steady at that level.
Brazil needs healthy cash reserves to defend the real,
widely considered overvalued by between 10 percent and 30
percent.
Foreign currency reserves according to the international
liquidity concept -- which includes accounts receivable --
totaled $70.21 billion in July, but the cash stock took a hit
in August as dollars fled for the safety of U.S. Treasuries.
The Central Bank said foreign reserves, as measured by the
liquidity concept, fell around $3 billion in August, though
some economists said actual losses could be twice that level.
Raising rates would sharply inflate the government's debt
servicing cost, a heavy contributor to a fiscal deficit
estimated at an annualized 7 percent of gross domestic product
(GDP).
This is particularly true since the government in June
resumed selling financial instruments known as "postfixed
letters", in an effort to calm domestic market unease about
international turmoil and local political concerns.
The instruments pay rates set after they mature, based on
the average overnight benchmark rate in the period, which
protects investors from interest rate fluctuations in the
period.
Brazil now has some 60 percent of its domestic debt stock
indexed to the overnight rate, said Constantin Jancso,
economist at consulting firm MCM.
"The effect of a rate increase on the fiscal accounts could
be so bad that it could have a negative impact on investor
confidence," he said.
joelle.diderich@reuters.com))
Copyright 1998, Reuters News Service |
