Research briefing: Institutions for Macroeconomic Stability in Brazil

September 4, 2014

Briefing based on IRIBA working paper 7, “Institutions for macro stability: Inflation targets and fiscal responsibility,” by José Afonso and Eliane de Araújo – International Research Initiative on Brazil and Africa, 08/2014

In the 1960s, military governments promoted far reaching structural economic reforms, creating innovative and stable institutions based on standard international theories and best practice at the time.

In this context, the 1960s saw the launch of the Government Economic Action Plan (PAEG), which was intended to promote stabilisation and a return to growth. The fight against inflation took priority because it was impossible for the country to progress while suffering from hyperinflation.

With an initial focus on monetary institutions, financial reform was focused on creating long-term financing mechanisms, avoiding inflationary public sector financing, and re-attracting private sector investment to industry, in order to drive growth.

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Brazil swap rates surge on industrial output gain; Real declines

August 2, 2013

Blake Schmidt & Josue Leonel – Bloomberg, 08/01/2013

Brazil’s swap rates climbed the most in six weeks as higher industrial production spurred speculation that the central bank will sustain the pace of increases in borrowing costs to curb inflation.

Swap rates due in January 2015 rose 25 basis points, or 0.25 percentage point, to 9.84 percent in Sao Paulo, the biggest increase since June 18. The real dropped 1.2 percent to 2.3042 per U.S. dollar, the weakest level since March 2009.

Industrial output rose 1.9 percent in June from a month earlier, exceeding the 1.3 percent median forecast of economists surveyed by Bloomberg. Policy makers raised the target lending rate by a half-percentage point July 10 to 8.50 percent, the third advance this year. The central bank said in minutes of the meeting that it is appropriate to maintain the pace of increases in borrowing costs to curb inflation.

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Brazil sees unfavorable inflation outlook, slower growth in 2013

June 27, 2013

Matthew Malinowski & Raymond Colitt – Bloomberg, 06/27/2013

Brazil’s central bank cut its growth forecast and said the outlook for inflation, already running above target, is unfavorable as the real posts the largest decline against the dollar among major currencies.

Policy makers, in their quarterly inflation report today, said inflation will reach 6 percent this year should the benchmark rate remain unchanged at 8 percent, up from a March forecast of 5.7 percent. They also cut the 2013 growth prediction to 2.7 percent, down from 3.1 percent.

President Dilma Rousseff’s administration is trying to steer Brazil’s $2.5 trillion economy out of its second-worst economic performance in 14 years without further stoking inflation. Government efforts have been complicated by the biggest street protests in more than a decade as 1 million people took to the street to press authorities for less corruption, lower prices and better public services. Rousseff vowed to improve health care, public education and transport, while maintaining fiscal austerity in the world’s second-largest emerging market.

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Protests in Brazil burst bubble: everything is not fine

June 20, 2013

Rasheed Abou-Alsamh – International Business Times, 06/20/2013

The mass street protests that broke out last week in Sao Paulo, and have since spread to other major cities in Brazil, caught many by surprise. Investors and politicians who thought the economic miracle of South America’s biggest country — the headliner of the BRIC group with Russia, India and China — would never end were especially surprised. So were many observers who had bemoaned the passivity of Brazilians in seemingly accepting corruption and overtaxing by their government. The past week’s events have shown that the Brazilian giant, sleeping for so long, has awoken again.

The protests began last week with a demonstration organized by the Passe Livre (Free Pass) movement, a leftist group that wants free public transportation in all of Brazil as its ultimate goal. The announcement that bus fares were being hiked from R$3 (US$1.37) to R$3.20 (US$1.47) was the spark for the march on Avenida Paulista, Sao Paulo’s largest boulevard.

The city’s mayor and the governor of Sao Paulo state, Fernando Haddad and Geraldo Alckmin, both said they would not budge on the price hike and promptly flew off together to Paris to pitch their city as a candidate host of the 2020 World Expo. As the demonstrations grew and continued, they quickly returned home. But it was not until violent clashes between protesters and riot police, using rubber bullets and tear gas on June 13, which left 105 protesters and 12 policemen wounded, that they started to pay attention and soften their stance. On Thursday, Sao Paulo and Rio de Janeiro, the country’s two largest cities, both decided to backtrack and cancel the fare hike.

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Trattoria dumps tomatoes to protest Rousseff’s inflation stance

April 9, 2013

Joshua Goodman & Denyse Godoy – Bloomberg, 0/09/2013

One of Sao Paulo’s most traditional Italian restaurants is urging its clients to forgo the tomato to protest what it considers President Dilma Rousseff’s policy of promoting growth at the expense of higher inflation.

Augusto Mello, owner Nello’s Cantina, last month began curtailing his tomato purchases to protest a tripling in prices for the vegetable over the past year to 150 reais ($75) for a 20-kilogram crate. A sign on the entrance of the 38-year-old restaurant urges patrons to become “conscientious consumers” and help fight inflation by ordering dishes without red sauce.

The one-man crusade may be touching a nerve with consumers, whose pockets are being squeezed by surging prices for food and services. A report tomorrow will show that inflation breached the 6.5 percent limit of the government’s target range in March for the first time in 16 months, according to a Bloomberg survey of economists, even as the economy struggles to regain its footing after its second-worst performance in 13 years in 2012.

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Brazil Miracle architect emerges as ally of Rousseff’s rate cuts

March 15, 2013

Joshua Goodman – Bloomberg, 03/15/2013

Brazil should refrain from raising interest rates if President Dilma Rousseff hopes to win a “tug of war” with banks and spur faster growth, the architect of the country’s economic miracle in the early 1970s said.

Antonio Delfim Netto was finance chief when Brazil’s dictatorship jailed the then-Marxist activist Rousseff in 1970. Now, as a consultant and columnist he’s an often solitary voice praising her government’s cutting of rates to a record and use of capital controls to weaken the real.

Delfim Netto’s views run contrary to that of economists from Itau Unibanco Holdings SA, the nation’s largest bank, and JPMorgan Chase & Co., who say Rousseff’s policies on rates and the currency have been stoking inflation above the 4.5 percent target since 2010. Rousseff is on the right track and should stay the course, defying rate-swap traders who expect the central bank to raise interest rates 150 basis points by year-end, he said.

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Brazil yields to traders pouncing on gains: currencies

March 14, 2013

Joseph Ciolli & Ye Xie – Bloomberg, 03/14/2013

Efforts by Brazil to tame inflation are providing foreign-exchange traders with the biggest returns in the world by purchasing reais with funds borrowed in dollars.

Investing in real forward contracts funded by the greenback has gained 5.3 percent this year, the most of any of the 44 other currencies tracked by Bloomberg. Wagers that Brazil’s currency will rise outpaced those expecting a decline by an average of $5.6 billion this year, data from the Sao Paulo-based BM&F exchange and compiled by Bloomberg show. As recently as September there were net bets against the real.

Finance Minister Guido Mantega, who popularized the term “currency war” in 2010, told Bloomberg News last month he’s abandoning the strategy that drove the real down 19 percent in two years as the government shifts its focus to containing inflation. The central bank signaled on March 6 that it’s ready to raise interest rates from a record low 7.25 percent after dropping a pledge to hold borrowing costs steady for what it had called “a prolonged period of time.”

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