Brazil & Southern Cone - October 2008 (ISSN 1741-4431)

On 3 October the central bank raised its interest rates by half a percentage point to 7.75%.  This chunky rise was the first move by the central bank so far this year, and came at an odd time, when the rest of the international financial world was in crisis.

Inflation in September was 0.6%, a considerable improvement on August's 1.02%.  The September figure was only a bit above the consensus forecast collated by the central bank (0.46%). The lagging 12-month figure for inflation is now 7.46%. The government target is for a rate of between 3% and 7% for 2008.
In September, prices set by the government barely rose as did fresh foods, so the recidivists were tradeables and non-tradeables. These rose by almost 1% in September, which suggests that bank had to act decisively to break the spiral of inflationary expectations. One reason  prices are shooting up is that the domestic economy has been much stronger than policymakers expected. Some of this growth has been produced by the one-off effect of the commissioning of the Botnia paper mill.  The central bank is clearly bothered that it may have let the economy get ahead of itself: the bank doubled the overnight lending rate (to 20%) to make banks more cautious about lending and also ruled that banks can only use this facility a maximum of three times each month.

Another reason for the interest rate increase at the beginning of October was to put some sort of floor under the peso. In September the peso had began to weaken against the dollar, along with the Real and the Chilean peso.