Cooling Off Brazil Brazil's central bank is trying to throw cold water on the country's hot economy.
On Thursday, Brazil, Latin America's largest economy, reported that the unemployment rate for the month of June was 7.8%, lower than the 7.9% measured in May, but slightly ahead of the 7.7% expected. "Labor market conditions remain robust," said Rafael de la Fuente, chief Latin American economist at BNP Paribas.
The employment data came one day after the Brazilian central bank, worried by accelerating inflation, surprised the markets by raising interest rates 75 basis points to 13.00%. It was the third rate hike this year, following 50 basis point increases.
The central bank's monetary policy committee said the higher hike was made to "promote the gradual convergence of the actual inflation rate with the targets set." The Sao Paulo Stock Exchange's benchmark Bovespa index fell 3.3% to 57,434 points.
"What's going on in Brazil merits a strong market response," said Rafael de la Fuente. "The economy is buffeted by the same external shocks of food prices that are affecting other countries, but on top of that they have domestic demand that's booming. The economy may be overheating and that requires the central bank to bring monetary policy that sends them message that inflation has to be brought down and will be brought down."
Economists and brokers questioned by the central bank are forecasting inflation this year will hit 6.53%- higher than the government's target of 4.5%, and above the bank's ceiling of 6.5%.
Brazil's interest rates are among the highest of significant emerging economies in the world. Only Turkey, with a rate of 16.75%, outstrips it. For authorities, the trend is worrying, especially as ratings agencies recently raised the country's sovereign debt to investment grade after it convinced the markets it had finally closed the door on its past propensity to hyperinflation.
But even though the worldwide downturn is dampening growth, Brazil's gross domestic product is still expected to expand 4.8% this year, down from 5.4% last year.
Central bank chief Henrique Meirelles has vowed to bring inflation back to 4.5% by the end of next year, suggesting that more interest rate increases are in the pipeline.
To combat inflation, Mexico, Latin America's second-largest economy, recently made the controversial move of capping food prices. The government's effort did not deter the central bank from raising the key interest rate though by 25 basis points to 7.75% at its monthly monetary policy review. (See "Mexico Central Bank Hikes Rates") |
