beyondbrics

Little surprise this evening as Brazil’s central bank raised its policy rate by three quarters of a point to 9.5 per cent a year, making the first of what are widely expected to be four similar increases between now and September in a bid to bring Brazil’s overheating economy back to more sustainable rates of growth.

As problems go these days, too much growth is not such a bad one to have to deal with. Brazil’s economy is expected to expand by about 6 per cent this year – the stuff of dreams for most developed economies but too much for Brazil, where the potential or non-inflationary rate is about 4.5 per cent.

It is a shame that the central bank and its monetary policy makers are being left to deal with Brazil’s imbalances alone. Tackling the country’s structural problems – poorly directed government spending, not enough infrastructure, woeful standards of education and a rigid labour market – would unleash Brazil’s enormous potential without the central bank having to stand on the brakes.

Some of these things, especially the shortage of infrastructure, are gradually being addressed. The rest, sadly, are also the stuff of dreams.

One thing catches the eye in the central bank’s brief statement – the word “unanimity”. At its previous meeting in March, when it left the rate unchanged, the bank’s monetary policy committee was split, with a minority voting for a half-point increase. Since then, two of its most hawkish members have left, probably to rejoin the private sector, leaving only career public servants under Henrique Meirelles, the bank’s governor and a former head of BankBoston. Unanimity will reinforce his authority and add to the bank’s resolution in the difficult task ahead: raising rates at every opportunity between now and general elections in October.

Related reading:
Brazil raises interest rate by 0.75 percentage points, FT
Brazil’s economic growth: too fast too soon?, BB
Spending binge puts Brazil’s ‘red hot’ economy at risk, BB
Inflation threatens Brazilian expectations, FT