Brazil's Central Bank Sharply Increases Interest Rates

Contra Turkey which reportedly will use forex reserves to defend her currency, Brazil has taken the second approach: raise interest rates.

This will be the third time for Brazil’s central bank to raise interest rates. 

Earlier I posted that Brazil’s interest rate hike serves as a signal to the end of the easy money environment. Such series of rate increases will eventually prick on Brazil’s once sizzling hot property bubble.

From Reuters:

Brazil raised its benchmark interest rate to 8.50 percent from 8 percent on Wednesday, maintaining the pace of monetary tightening to battle above-target inflation in Latin America's largest economy.

The central bank's monetary policy committee voted unanimously to hike its Selic rate by 50 basis points, a move widely expected by markets.

Under the leadership of Alexandre Tombini the central bank has hiked rates three consecutive times this year in a bid to regain its credibility as an inflation fighter and curb prices, which in June rose at their fastest pace in 20 months.

"The Committee understands that this decision will contribute to lowering inflation and ensuring that the trend continues next year," the central bank said in a statement, repeating the same language used in the previous decision.

A sharp depreciation of the real, which increases the value of imports, poses a serious challenge for the central bank, which has pledged to bring inflation below the 5.84 percent mark recorded last year.

Brazil’s central bank has only been realigning her policies with the actions of the bond market, where 10 year yields have rallied sharply.(chart from Tradingeconomics.com)

Brazil’s stock market benchmark, the Bovespa, has morphed from a correction into a full scale bear market cycle. The Bovespa has been down by 28% yesterday from the January 2013 peak. Boom turned into a bust in about half a year.

So far, earlier rate increases has failed to contain the US dollar –Brazil real upswing.  Said differently, Brazil's real continues to tank.

The last time the USD-real reached such highs, Brazil succumbed to a recession.

My guess is that, in the backdrop of even larger bubbles, this time won’t be different. 

Moreover, my guess is that the actions of central banks of Brazil and Turkey will serve as blueprints for emerging markets, including emerging Asia and the ASEAN