Published by Minyanville

Brazil’s central bank has hiked its key interest rate to 12.25% in the fourth rise this year. Aiming to curb inflation of 6.55%, far higher than the year target of 4.5%, the move maintains Brazil’s position as the country with the highest real interest rate in the world, of any substantial economy.

“The committee believes that implementing monetary policy adjustments for a period that is sufficiently prolonged continues to be the most adequate strategy to guarantee the convergence of inflation to the target in 2012,” the central bank said in a statement that was eerily similar to one released in April when the rate last went up.

This similarity is being taken as evidence that more is to come, according to Marcelo Salomon, chief economist for Brazil at Barclays. “If they’d wanted to signal that this was the last one, or that they are close to the last one, they would have changed the phrase,” he told Bloomberg.

“Since the Board’s statement was little changed from the previous month, it seems clear that rates will continue to be increased in quarter point steps,” echoed David Rees, Emerging Markets Economist at Capital Economics in London. He expects CPCI to peak at 7% towards the end of the third quarter.

“Although commodity prices have now fallen back from April’s spike, the lagged impact on food prices will probably drive headline inflation higher over the coming months,” he says. “But thereafter, although some underlying core price pressures may emerge, the CPI rate should gradually ease back towards target in the second half of next year as the commodity price shock is reversed and GDP growth slows.”

Central bank president Alexandre Tombini has said policymakers are keen to meet a 4.5% inflation target plus or minus two percentage points.

So far the bank's many interest rate rises seem to be having an effect. Month-on-month inflation during the last year has decelerated to 0.47% compared to 0.77% in April.

The rate hike was no surprise to analysts or investors. "The market impact was neutral. The quarter-point rise had been widely anticipated,” BES investment fund economist Flavio Serrano told Wall Street Journal.

Many developing markets such as Brazil, China and India are currently fighting the inflation that comes with their rapid growth by implementing high interest rates. Conversely, many developed economies such as the United States are keeping rates extremely low in order to boost growth.

Reuters asked 14 analysts where they saw interest rates in Brazil at the end of 2011. The responses ranged from 12.25% to 13.25%, with the mode at 12.50%.

Two Giants of the Left Reunited

Venezuela’s President Hugo Chávez met with former popular Brazilian president Luiz Inacio Lula da Silva last week in Venezuela. The “two giants of the Latin American left”, as the Financial Times describes them, finished a four-hour meeting at midnight last Thursday. Though perhaps personifying the old and new left in Latin America, the pair have much common ground. Chávez claims they spoke about “imperial aggression against oil countries” such as his own Venezuela and Libya.

The trip came days before Brazil’s current president Dilma Rousseff welcomed Chávez to her own country. “Venezuela wants to strengthen its infrastructure and bring value to its natural resources," said Rousseff after the pair met. "Brazil should participate in this effort.” Despite Rousseff’s popularity, it's interesting to note that Chávez’s visit to Brazil is the first by a South American president since she took office in January.

Brazil’s Petrobras is waiting for Venezuelan state oil company Petróleos de Venezuela (PDVSA) to put its money on the table for a joint refining project to be based in Brazil. The Abreu e Lima refinery in Pernambuco is coming to the end of the $6.3 billion loan it has from Brazil’s own banking sector, according to the Wall Street Journal. The project was mentioned in the talks between Rousseff and Chávez, however, nothing was cemented.

Rousseff will be pleased at Ollanta Humala’s win in Peru’s presidential elections on Sunday. Humala once touted his ties to the socialist Hugo Chávez in Venezuela, however, shifted his alignment towards the more moderate and pragmatic left of Brazil after losing out on the presidency in 2006.