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

Lower-than-expected growth in Brazil and New Zealand have prompted their central banks to maintain rates; in South Korea, “greatly decreased” inflation motivated the hold decision, in spite of a “continued upward trend” in growth.

Brazil’s monetary policy committee, Copom, kept the Selic rate at 10.75 per cent, hinting that a rate cut might have been on the cards were it not for recent macroprudential policies, whose effects on monetary conditions were yet to be seen. Read more

A deputy governor at the People’s Bank of China has indirectly criticised the Fed’s $600bn stimulus plan, saying emerging market economies will have to stay alert for inflation and bubbles as a result of the scheme. Ma Delun also said the stimulus might also increase global imbalances, though it might help the US economy “to some extent”.

Similar comments – which amount to indirect accusations of selfish irresponsibility – were levelled by the Brazilian central bank governor on Friday. Henrique Meirelles said: “excess liquidity in the US is creating problems in other countries” and that this should be addressed at G20 meetings in South Korea. Read more

Using inflation-linked bonds to forecast inflation? Beware – new research suggests they are only decent predictors in the short-term. Over long horizons, the relationship is actually negative:

We showed that the break-even inflation is informative about future inflation over horizons of 3, 6, 24 and 30 months. For the 3- and 6-month horizons, besides being informative, break-even inflation is an unbiased estimator as well. However, over the horizons of 24 and 30 months, the relationship between the break-even and future inflations is negative. On the other hand, for the horizons of 12 and 18 months, breakeven inflation has almost no power to explain future inflation.

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No surprise from the monetary policy committee at Brazil’s central bank: its target overnight interest rate, known as the Selic, remains unchanged at 10.75 per cent a year, the committee announced on Wednesday evening after its latest meeting (held every six or seven weeks).

The Copom, as the committee is known, was unanimous in its decision, as were analysts in their expectation that this was what it would do. The bank was hardly likely to raise interest rates so soon after the finance ministry unleashed its latest weapons in the currency war, even if inflation expectations have been creeping up.

According to the central bank’s latest survey of market economists, published on Monday, consumer price inflation is expected to reach 5.2 per cent this year and 4.99 per cent in 2011, above the government’s target of 4.5 per cent. Expectations have been on the rise for the past five weeks. Meanwhile, economist at the bank’s “top 5″ institutions (those who most often get these things right) are predicting CPI of 5.31 per cent this year and 5.71 per cent in 2011. So it looks as though a big miss is on the cards, this year and next. Read more

Brazil’s central bank surprised many economists by raising interest rates by less than expected last week. Today, it published the minutes (in Portuguese only) of the monetary policy committee meeting at which the decision was taken. Anyone hoping they would make matters clearer may be disappointed.

As expected, the committee said weaker global and domestic demand had contributed to its decision. Less predictably, it suggested it would be happy to bring consumer price inflation in line with the government’s 4.5 per cent target only in early 2012, rather than during next year.

The minutes are clearly open to interpretation. In a note to clients, Itaú Unibanco said they confirmed its view that the committee, known as the Copom, would leave rates unchanged at its next meeting on August 31 and September 1. Barclays Capital, on the other hand, said they supported its call for a 50 basis point increase at the next meeting and a 25bp increase in October. Read more

With a short, sweet statement, the Bank of Brazil raised the key policy rate to 10.75 per cent late yesterday. A rise had been expected – some thought the rate would go to 11 per cent, in line with the two previous 75bp rises – to combat inflation. “Assessing the macroeconomic situation and prospects for inflation, the Committee decided unanimously to raise the Selic rate to 10.75% pa, without bias,” reads the statement (according to Google Translate).

This is the third consecutive rise since April 29, when the Selic target rate stood at 8.75 per cent; the rate was last increased on June 10.

It’s easy to get blasé about Brazil: the economy is thumping along; markets are relaxed about the forthcoming election; and nobody seems that excited – or even perturbed – by a further rise in interest rates on Wednesday.

So to wipe away any encroaching holiday stupor, consider this. Brazil probably has the highest real interest rates in the world, by a very fat margin (real interests being central bank rates minus inflation). And, by this evening after the central bank raises nominal rates by an expected 75 basis points to 11 per cent, they will be even higher still.

In the developed world, the historic real rate is about 3 per cent. But today, Japan excepted, real rates are all negative. They are about -1.5 per cent in the eurozone, and a chunky deflation-beating -2 per cent in the US and the UK. The emerging world should have a higher real cost of capital – because of risk, and perhaps lack of savings. Yet today, real rates are mostly negative in the emerging world as well. Read more

For the second time in a row, Brazil’s central bank has raised the Selic target rate by 75bp, as the economy expands rapidly and fears of inflation mount.

Historically, interest rates in the country are still low (see chart). Rates were last at 10.25 per cent in April of last year. The inflation target is currently 4.5 per cent +/- 2 per cent, and the data to May was rising, but within target, at 5.17 per cent. Read more

By Jonathan Wheatley

More on the debate about whether Brazil is overheating: Henrique Meirelles, central bank governor, weighed in today on the “No, it’s not” side with an assurance that inflation was under control, delivered on the sidelines of a meeting of G20 finance ministers and central bankers in Busan, South Korea.

He would say that, of course. The central bank has fielded a lot of criticism from market economists in recent months accusing it of being behind the curve in the fight against inflation. The bank raised its policy interest rate on April 28, its first rise since the last easing cycle, which lasted from January to July last year.

Critics say even the bigger-than-usual three quarter point increase was too little and too late to deal with Brazil’s ever faster pace of growth. Read more

By Jonathan Wheatley in São Paulo

Brazil’s central bank raised its core interest rate by three-quarters of a percentage point on Wednesday evening, confirming market expectations that it would act aggressively to deal with rising inflation and the threat of an overheating economyRead more

Brazil’s central bank is expected to raise its core interest rate by as much as a full percentage point this evening as the unexpectedly fast pace of economic growth puts increasing pressure on prices.

Predictions for economic growth, inflation and interest rates at the end of 2010 have all risen sharply in recent weeks, adding to near-certainty among economists that the bank will raise its target overnight rate, known as the Selic, for the first time since September 10 2008 – less than a week before the collapse of Lehman Brothers and the ensuing global crisis took the pressure off an economy that was showing dangerous signs of overheating. Read more.

Simone Baribeau

Some Latin American countries have made some less-than-orthodox decisions during the crisis. What does the IMF have to say about them? For the most part, Nicolás Eyzaguirre, the IMF’s director of the Western Hemisphere department, was, if not supportive, not critical either.

Asked at a presser during the IMF spring meetings about Argentina’s decision to pay back its debt using central bank reserves (a saga which felled one resistant central bank governor), Mr Eyzaguirre responded: “Each country decides on its own sovereignty how it’s going to decide with debt management, so we don’t have an opinion on that.”

He was also emphatic that the Fund had not objected to Brazil’s decision to tax capital inflows. “Our first reaction Read more

The central bank of Brazil has announced a rise in reserve requirements for larger banks, reversing the lower levels permitted during the crisis.

Two moves are intended to soak up 71bn reais ($39bn) from the Brazilian financial system: (1) reserve requirements for time deposits will be raised to 15 per cent from 13.5 per cent; (2) additional requirements for demand and time deposits will be raised to 8 per cent from 5 and 4, respectively. The moves will take place on March 22 and April 9. Read more