Brazil’s central bank meeting today is expected to end with a hefty hike to the country’s key interest rate.
The hike should start today with a 0.50% increase to the overnight rate, which will eventually increase to a 1.50% hike over the next few months, according to Societe Generale.
Inflation has been zooming in Brazil, with CPI in December of 5.9%, year-over-year. The problem is inflation expectations are continuing to rise for the years 2011 and 2012 and the government is doing nothing to tame its expansive fiscal policy.
So monetary policy measures are the only means of taming inflation, and Societe Generale expect rate hikes could even be higher than they predict.
From Societe Generale:
Given that inflation is already high, and in light of the existing fiscal uncertainty, the bank needs to show a strong commitment to bring inflation back to its target very soon, as the risk of falling behind the curve is already high. Indeed, our bias for rate hikes is for more rather than less, even though Bloomberg’s latest survey shows analysts do not consider an alternative scenario to a 50bp hike.
Brazilian inflation expectations, looking ahead.
Photo: Societe Generale