BRAZIL-The three characteristics of the Central Bank

Autonomous, independent, and obedient

The press informed today that following a private audience with Dilma Rousseff, Alexandre Tombini, President of Brazil’s Central Bank reduced market expectations for a 0.5 percentage point increase in the base interest rate (SELIC), to be announced today. The market now expects the increase to be 0.25 percentage points to 14.5%.

Tombini was quoted that the recent reduction of the IMF forecast for Brazil’s 2016 GDP growth to -3.5% (see yesterday’s post) was instrumental in considering a reduction of the increase.

It’s not exactly clear to me how the IMF forecast affects the Monetary Policy Committee’s decision, but if Tombini says it does, then I guess it does!

(And just for the record, to attribute to John Maynard Keynes the policy-thinking of the current Brazilian administration is just this side of economic heresy!)

Maybe it doesn’t matter very much if the rate increases at all! Dilma Rousseff, who drives economic policy has said that she is not convinced of the efficacy of monetary policy to contain inflation. She might just be correct when federal deficits outrun attempts to rein in inflation. The deficits caused by spending in excess of revenues have to be “monetized” and that means increasing liquidity. If that liquidity is not absorbed, inflation rises to devalue the currency in circulation. 

At the very least, it will be interesting to see if Nelson Barbosa makes any reference to Brazil’s monetary policy in his address to the World Economic Forum on Friday.

At this moment, the only way I see inflation declining in 2016 is if the economy slips into depression with massive unemployment and private consumption and investment in the cellar.

Watch this closely.