Banco de Brasil

Claire Jones

Mirror, mirror on the wall, who’s the biggest quantitative easer of all? Brazil has long accused governments in the developed world of using loose monetary policy to pump up their economies and get a competitive edge. But it may be time for Brazil to reflect on its own actions over the past five years.

During that time, Brazil has received huge capital inflows, pushing its foreign reserves from about $80bn at the end of 2006 to about $380bn today (see chart below). The central bank says it has “sterilised” those potentially expansionary and inflationary inflows by selling government bonds – standard practice at central banks around the world.

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While Brazil surprised the markets with a bigger-than-expected interest rate cut, South Korea and Indonesia on Thursday delivered exactly what had been predicted. 

The Bank of Korea and Bank Indonesia both left rates unchanged – in a clear sign that concerns about the impact of rising oil prices on inflation are matching worries about the threats to global growth coming from the eurozone. It’s a striking shift for Indonesia, which has – like Brazil – been a standard-bearer for aggressive pro-growth rate cuts.

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Claire Jones

Our week ahead email helps you track the most important events in central banking. To see all of our emails and alerts visit www.ft.com/nbe

BofE

The Bank of England’s financial (in?)stability report is due out on Thursday. Read more

Claire Jones

The dip in the price of gold in early autumn failed to do much to dampen demand from the central banks. In fact, their buying rocketed. This from the FT’s Jack Farchy:

Central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated the shift to bullion as a means of diversification.

The scale of the buying, at 148.4 tonnes on a net basis, was far bigger than previously disclosed, surprising some traders.

 

The report by the World Gold Council, industry lobbyists, on which the story is based confirms a few of Money Supply’s earlier suspicions about why central bank demand would to remain strong, or even rise, on the back of the dip in price. Read more

A bill making its way through Brazil’s Senate confirms what many economists have suspected for a while. Politicians in Brasília are preparing to widen the central bank’s mandate to focus not just on inflation but also on economic growth and employment creation.

At issue is the credibility of one of the central pillars of Brazil’s economic prosperity for more than a decade – the inflation-targeting regime. The bill, which was approved by the powerful economic commission of the senate this week and now must go to the full Senate and the lower house, is sponsored by Senator Lindbergh Farias of the governing Workers’ Party.

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Claire Jones

The Central Bank of Brazil shocked markets in August by lowering its benchmark rate to 12 per cent. Will it cut again this Wednesday? Analysts expect so.

The Central Bank of Turkey, another of the emerging market central banks that has been taking economists by surprise by loosening policy, votes on Thursday, as does the Central Bank of the Philippines. Read more

Claire Jones

Luckily for this blog, monetary policy is no longer as “boring” as Sir Mervyn King would like.

Still, it remains predictable enough that economists are rarely surprised by decisions. Especially for those central banks that target a certain level of inflation. Recently, however, most have been getting it spectacularly wrong on some of the key emerging market votes, notably Turkey’s and Brazil’s rate cuts.

They might have called it right had they read this collection of papers, published by the Bank for International Settlements yesterday.  Read more

Claire Jones

The Bank of Israel – one of the first to raise rates following Lehman Brothers’ failure – on Monday became the latest to override domestic price pressures and cut on the back of concern over the global outlook.

Following the lead of the central banks of Turkey and Brazil before him, Stanley Fischer, the Bank’s governor and  sole rate-setter, shaved a quarter point off Israel’s benchmark interest rate to leave it at 3 per cent, despite inflation rising by half a percentage point to 3.4 per cent last month, above the 3 per cent upper limit of the inflation target range.

Public outcry at high inflation – particularly food price pressures – has inspired Facebook groups that have attracted over 100,000 members. And rising house prices have prompted more than a quarter of a million Israelis to take to the streets. (The central bank maintains that its measures, along with more house building, will slow the pace of house-price inflation).

Growth – at 2.4 per cent in the second quarter (annualised) – is relatively high, and unemployment – at 5.5 per cent – low.

All of which has meant that analysts – the vast majority of which had forecast a rate hold – were taken aback.

So why has Mr Fischer cut rates?  Read more

Claire Jones

Rate decisions

Next week sees a host of central banks vote on monetary policy.

The Reserve Bank of Australia’s board is expected to hold rates on Tuesday. On Wednesday Sweden’s Riksbank, the National Bank of Poland, the Bank of Japan and the Bank of Canada are all set to vote. Read more

“Give me a one-handed economist!” President Truman used to ask. But look around the world at the moment, and it is divided between economists offering the kind of “on the one hand, on the other hand” advice that so exasperated Truman.

Brazil’s central bank clearly did not feel sitting on the fence was an option. It has just delivered a surprise 50 basis point cut. Financial markets’ parsing of this unexpected move is that Brazil believes growth rather than inflation is its biggest concern. This has prompted economists at HSBC to wonder who might be next. “Will everyone now go Brazilian?” it asks.

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Claire Jones

Our new week ahead email will help you to track the most important events in the central banking world. To see all of our email and alerts visit www.ft.com/nbe

Public appearances

A busy week is in store for Jean-Claude Trichet.

On Saturday, the ECB president will speak at Jackson Hole at 17:00 GMT. On Monday, Mr Trichet travels to Brussels, where he will field questions from the European parliament on how to restore market confidence (some suggestions from Ralph Atkins and Chris Giles).

The president will be joined by Jean-Claude Juncker, Eurogroup president, Jacek Rostowski, Poland’s finance minister and Olli Rehn, the European commissioner for economic and monetary affairs.  The hearing takes place at 13.00 GMT.

On Thursday, ECB executive board member Jürgen Stark is a participant in a panel on Europe and global competitionRead more

Claire Jones

Central bankers this week have acted on fears that the global outlook could weigh on domestic growth.

The Central Bank of Turkey’s shock decision on Thursday to cut its policy rate to an all-time low in the face of strong growth and above-target inflation shows just how pronounced those fears are.

Japan and Switzerland have both attempted to counter their currencies’ rapid appreciations over recent weeks, which have occurred on the back of events in the US and the eurozone.  Read more

Claire Jones

This from the FT’s Joe Leahy and Samantha Pearson in São Paulo:

Brazil’s central bank has raised interest rates for the fifth time this year as the country battles inflation above official target levels. Read more

Claire Jones

Brazilian finance minister Guido Mantega’s distaste for QE2 is well known. The Federal Reserve may have decided to give Brasilia a little of its own medicine, however.

Research published on the Fed’s website over the weekend takes aim at Brazil’s use of reserve requirements – the proportion of a bank’s reserves that they are required to park at the central bank – as a tool to manage liquidity.

The use of reserve requirements for this purpose (rather than to combat inflation, as is usually the case), is especially pertinent at the moment given that the Liquidity Coverage Ratio has become one of the more controversial aspects of Basel III. Read more

Claire Jones

Macroprudential is the buzzword of the moment (as this post notes, policymakers are keen to slap the label on anything they can). But do macroprudential measures actually work?

Of course, that depends on defining what “work” means, which – given that there are no precise indicators of financial stability – is no easy task.

Around the cusp of the year, Brazil introduced its own macroprudential measures, which included higher capital and reserve requirements, and limits on vehicle financing. Their stated aim: “to allow the continuity of sustainable credit market developments” following rampant credit growth of 22% last year.

So have they fared? Read more

Brazil has raised rates half a point to 11.75 per cent, the second rise in three months. Copom, the monetary policy committee, voted unanimously for the raise to rein in inflation. A single sentence accompanied the decision, offering no clues as to the thoughts of policymakers on the future direction.

Prices rose 6.08 per cent in the year to February, above the central bank’s 4.5 per cent target, though within tolerance bands of +/- 2 percentage points. Given the strength of recent inflation, some analysts had expected a three quarter point rise in the selic rate. Significantly, though, food price pressures have receded in Sao Paolo, data showed today.

Alexandre Tombini, Brazil’s new central bank governor, has sought to establish his credentials as an inflation fighter with the release of a tougher-than-expected statement from the central bank. Mr Tombini, a central bank technocrat, replaced established hawk Henrique Meirelles in November. Analysts had feared the appointment might signal a closer relationship between central bank and finance ministry, and, ultimately, less rigour in monetary policy.

In the minutes of the central bank’s policy meeting of last week, released on Thursday, the institution warned about the need to restrain wage growth and public spending if Brazil is to meet its inflation targets. Wage rises were singled out as a particular risk facing the economy. [Bloomberg reports today that consumer, construction and wholesale prices rose 11.5 per cent in the year to January, exceeding expectations.]

“The prospective scenario for inflation has evolved in an unfavourable manner,” the central bank said in minutes from the last copom meeting, at which interest rates were raised 50bp. “The committee notes relevant risks arising from the gap in supply and demand.” Early indications from Ms Rousseff, president, and Mr Mantega, finance minister, suggest they are changing tune on fiscal spending, with both calling for budget cuts to help rein in inflation and the appreciation of Brazil’s currency, the real, against the dollar.

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Brazil has raised rates by 50bp to 11.25 per cent to try to bring inflation back to target. The central bank also introduced new reserve requirements for dollar short sellers recently, in an effort to counter inflationary pressure on the real. Prior to the rise, the selic rate had been on hold for about six months at 10.75 per cent (see chart).

Consumer price inflation ran at 5.91 per cent in the year to December, in the upper end of the target range of 4.5 per cent +/- 2 percentage points. This was the highest since at least December 2008, when the Bank’s historical series begins.

Banks betting that the real will go up have 90 days to comply with a new reserve requirement from the central bank aimed at weakening the real. The measure is the latest in a series of tools emerging markets are adopting to slow currency appreciation.

Financial institutions with short dollar positions must deposit cash – which will not earn interest – at the central bank. According to the release, the amount is worked out by formula (via Google Translate):

financial institutions should collect the Central Bank in the form of compulsory deposits, 60% of the value of the sold foreign exchange position that exceeds the lesser of: $ 3 billion, or heritage reference (PR). This compulsory deposit will be collected in kind and will not be paid. Institutions will have 90 days to fit the new rule.

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Interest rates might need an “adjustment” to stem the rise in consumer prices, Brazil’s central bank has said. The country’s key selic rate has increased several times since the cuts that followed the financial crisis, but levelled off at 10.75 per cent in June.

The Bank’s inflation report, released yesterday, suggested such a rise was imminent:

Under the inflation targeting regime, deviations in projected inflation from the target of such magnitude suggest the need for implementation, in the short-run, of an adjustment in the basic interest rate, in order to control the growth pace mismatch between the domestic demand and the productive capacity of the Brazilian economy, as well as to reinforce the anchorage of inflation expectations.

Some analysts have interpreted this as a January rate rise.

Banco Central do Brasil explained that the balance of risks associated with inflation had “evolved unfavorably since the release of last Report”. Read more