Brazil’s central bank showing no mercy on rates

Brazil’s central bank showing no mercy on rates

The economy is slipping into its worst recession in 25 years; falling prices are spooking central banks around the globe; rates in Latin American peer economies are much lower, below 5 percent.

Nearly every other central bank, from Japan and Australia to emerging market rivals China and India, have eased policy since the start of the year. Even Russia, a hot spot for currency crises, is going the opposite way, slashing its benchmark rate to 12.5 percent on Thursday from 14 percent previously.

Some forecasters are even saying the Federal Reserve and the Bank of England, not long ago touted by most to be leading the world with policy tightening this year, now won’t raise rates until 2016.

Still, most observers in Brazil and abroad are stepping short of calling the central bank’s strategy overkill. Several are predicting yet another hike this year as Brazil’s long battle with high inflation continues.

It is all about trying to re-establish credibility. But many economists are failing to highlight how risky it is for a central bank to be trying to build credibility by hiking rates when the rest of the world is headed in the opposite direction.

Indeed, economists calling for rate hikes are the same ones who lambasted the central bank for slashing interest rates to record lows in 2012, even when inflation was above the official target. The bank’s strategy failed, heightening Brazil’s chronic imbalance between strong demand and insufficient supply.

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