beyondbrics

Wednesday night’s decision by Brazil’s central bank to leave interest rates unchanged was expected by most economists. But it still raised several analysts’ eyebrows and poses some big questions about the conduct of monetary policy as a new government prepares to take office next year.

Three sets of arguments were making the rounds before Wednesday’s meeting of the monetary policy committee (Copom): 1, the central bank must act now; 2, the central bank must act soon; 3, there is no need for action before the second half of 2011. In a longer than usual statement explaining its decision, the bank seemed to put itself in the centre ground.

Here is the statement, translated by beyondbrics:

Evaluating the macroeconomic situation and the outlook for inflation, the Copom decided unanimously to keep the Selic [the bank's policy interest rate] at 10.75 per cent a year, with no bias.

In the face of a less favourable outlook than that observed at the last meeting, but taking into account the fact that, given conditions of credit and liquidity, the Central Bank recently introduced macroprudential measures, there was an understanding among the members of the Committee that more time was needed to gauge the effects of those initiatives on monetary conditions. Therefore, the Committee took the view that it would be inappropriate to re-evaluate its monetary policy strategy at this meeting and will pay close attention to the evolution of the macoreconomic scenario until its next meeting, to define at that time the next steps in its monetary policy strategy.

(You can read about those “macroprudential” measures here.)

What does the statement tell us? To say the Copom will take its next decision at its next meeting means nothing – unless it means something.

But if the bank – as it almost never has before – is signalling the need for an early rise in interest rates, why did it not do it now?

Two possible reasons spring to mind:

1. Politics: This was the Copom’s last meeting under Henrique Meirelles (pictured), governor throughout the Lula administration. He will be replaced by Alexandre Tombini, an admired but (to the public) little-known technocrat, in January. If the incoming government of Dilma Rousseff wants to stamp its authority early, January would be a better time to do it than December.

2. The exchange rate: The finance ministry has only recently used capital controls in the currency war and has said it is prepared to do so again. To raise rates would work in the opposite direction. By waiting and seeing, the central bank may hope it won’t have to hike after all, or at least not for a while.

Related reading:
Brazil leaves interest rates unchanged, FT