Central Bank of Brazil Lifts Selic Rate 25bps to 12.50%

The Banco Central Do Brasil increased the Selic interest rate by 25 basis points to 12.50% from 12.25% previously.  In its statement, Brazil's Central Bank Monetary Policy Committee (Copom) said: "evaluating the prospective scenario and the balance of risks for inflation, the Copom decided, unanimously, at this moment, to raise the Selic rate to 12.50% p.a., with a neutral bias."  The statement dropped the use of the words "prolonged period" in terms of adjusting monetary conditions, suggesting the Bank may be near an end to its tightening cycle.

Brazil's central bank also raised the Selic rate by 25 basis points to 12.25% at the June Copom meeting this year.  Brazil reported an annual inflation rate of 6.71% in June this year, up slightly from 6.55% in May, and just out side the official inflation target of 4.50% +/-2% (2.5-6.5%).  The Brazilian government is forecasting economic growth this year of 4.5-5%, compared to GDP growth of 7.5% during 2010.  The "BRIC" emerging market economy grew 1.3% q/q in the March quarter, placing annual growth at 4.2%.

The Brazilian central bank also made headlines earlier this month when it announced further measures to discourage dollar shorting in order to cap a persistent rally of its currency, the Real.  The central bank will require that banks with short US dollar positions hold 60% of the value of short positions greater than $1 billion in non-interest bearing deposits at the central bank.  The Brazilian Real has appreciated 20% against the US dollar over the past two years.

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