Central bankers around the world must be looking at Brazil with mixed emotions. The Central Bank of Brazil’s policy interest rate cut -- from 12.5 to 12 per cent -- inspires admiration, fear and jealousy.
The admiration is for continuing boldness. The central bank is bravely responding to the sudden deterioration in the global economic environment. If the global summer soft patch ends soon, or if Brazilian inflation starts to rise again, the bank will look foolish. But the slowdown bet looks good, if Thursday’s releases of surveys of manufacturing sentiment are any indicator: at recessionary levels in the U.K. and the lowest in two years in the euro zone.
The Brazilians are also admirable in their continuing battle against the country’s now fading tradition of high inflation. Even after the cut, the overnight rate is still around 5 percentage points higher than the inflation rate. That real rate is roughly zero in India, China, Russia and Japan and negative in the US, euro zone and U.K.
But the Brazilian cut sets two frightening precedents. First: political weakness. The crisis has made central bankers much more political, but in most countries they have the upper hand over politicians and regulators. In Brazil, it looks like the bank has yielded to pressure from the government to ease up. Second: policy impotence. The Brazilian central bank has proved no better than its peers at keeping inflation down and growth balanced and high. The rate cut is in part an admission that high rates have pushed up the currency and hurt exporters.
At least the Brazilians have room to manoeuvre. In almost every other country, additional monetary stimulus would be likely to do nothing more than blow dangerous financial bubbles. Central bankers can be excused for feeling jealous of the Brazilians’ freedom. |
