Brazil Ctrl Bk Raises Interest Rates To 19.00% Vs 18.25%
July 18, 2001
- - 18/07/01 23-05G
Selic rate history:
July 18 June 20 May 23 Apr 18 Mar 21 Jan 17
19.00% 18.25% 16.75% 16.25% 15.75% 15.25%
By Anthony Dovkants
Of DOW JONES NEWSWIRES
SAO PAULO -- For the fifth time in as many months, Brazil's central bank hiked interest rates Wednesday in a bid to ease inflationary pressure and currency volatility sparked by growing fears about Argentina's economic woes.
The central bank raised the benchmark interbank rate, or Selic, to 19.00% from 18.25%. This time, the monetary authority, locally known as Copom, said the hike came without bias. In June, the central bank set an easing bias after raising rates 150 basis points but couldn't deliver after regional turbulence took its toll on the weak real.
"With the aim of avoiding the spread of price changes following recent shocks to the economy and to vigilantly ensure that inflation stays on track, Copom decided to fix the Selic rate at 19.00%," the central bank said in a written statement following the monthly meeting of its monetary policy committee.
A Dow Jones Newswires survey of 14 financial institutions this week generated a consensus forecast of a 150-basis point increase, but predictions varied greatly.
While the result came in below the consensus forecast, it still met the market's expectations of between a 50 to 175 basis point increase, though some believed the Selic could have been hiked to as high as 25%.
Heightened concern about the impact of a possible debt default in neighboring Argentina has caused the Brazilian real to lose more than one-fifth of its value so far this year. Ahead of the central bank decision, the real finished slightly weaker Wednesday at BRR2.500 to the dollar on renewed Argentine worry, compared with Tuesday's closing mark of BRR2.498.
A local energy crisis and political instability have also hurt the real, but Argentine concerns have dominated the market tone recently. Reflecting investor nervousness, the yield on Brazilian money market rates has shifted higher, with futures contracts Wednesday projecting interest rates at about 21% by the end of August and 24% by the close of October.
Before Wednesday's decision, economists said a rate hike was necessary because the central bank needs to bring inflation under control after the 12-month IPCA Broad Consumer Price Index registered a 7.35% increase to the end of June. Analysts say inflation has now breached the tolerance range of the year-end official annual target of 4.0%, which has a leeway of two percentage points in either direction.
The inflation scenario is worrisome because an average exchange rate of BRR2.40 in the second half of the year could cause the inflation rate to finish the year at 7%, according to a preliminary forecast by Credit Suisse First Boston.
And a possible default in Argentina would make matters even worse, with some currency analysts saying such a development could push the real to BRR3.00 to the dollar.
Default or not, the tightening cycle is expected to continue to try and keep inflation and the real in check despite signs that South America's biggest economy has started to slow following recent interest rate hikes and the negative impact of an electricity rationing plan launched June 1.
Companies, shops and families are being required to cut back on electricity use by 20% on average for at least six months. Most economists believe the measure will trim this year's economic growth rate to 2.5% from an initially forecast 4% to 4.5%, while also cutting into 2002 growth.
-By Anthony Dovkants, Dow Jones Newswires; 55-11-3145-1478; anthony.dovkants@dowjones.com |
