Brazil

Interest Rates - November 2002

The Numbers in Detail

In its monthly meeting on 20 November, the Central Bank decided to raise the benchmark SELIC interest rate 100 basis points to 22.0%.  The decision to tighten stemmed principally from the recent acceleration in the currency deterioration and rising inflationary expectations.

In the past couple months, the Central Bank has acted decisively to tighten monetary reins.  In mid-October, the monetary officials raised bank capital requirements to cover foreign exchange exposure from 75% to 100%, reduced the limit on foreign exchange exposure for banks from 60% to 30% of net assets and raised reserve requirements on demand, time and savings deposits to 53%, 23% and 33% respectively.  Finally, in an extraordinary session the Central Bank decided to increase interest rates by 300 basis points on 14 October, raising the benchmark SELIC rate from 18% to 21%.  The Central Bank justified the measure by claiming that the recent exchange rate depreciation has led to deterioration in inflationary expectations and has raised prices beyond the Central Bank’s target of 6% for this year.  In the regular meeting of the Central Bank board on 23 October, monetary officials confirmed the earlier rate hike.  The most recent interest rate hike reflects Central Bank efforts to maintain monetary discipline but has also now brought interest rate back up to levels not observed since June 1999.

Consensus panellists anticipate that the uncertain trajectory of the exchange rate and rising inflationary expectations are likely to keep interest rates high for the remainder of the year.  The Consensus for the SELIC rate has been raised again.  Similarly, even though the incoming government is expected to lower interest rates next year, the levels of interest rates are expected to be higher than anticipated previously, as the forecast for the SELIC has been raised for 2003 as well and is now well above the Central Bank target.

Forecasts: This indicator is covered in the LatinFocus Consensus Forecast.  For 5-year projections, including quarterly forecasts for the next two years, please click here