brazil

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. Read more