Brazil’s second-quarter growth figure, due to be announced August 30, is likely to look anaemic — around 1%, well off the pace of the 2.5% for the year that Finance Guido Mantega recently predicted. But inflation and a rapidly depreciating currency, not growth, are the immediate focus of policy now as the economy goes through what Mantega has called a “mini-crisis.”
The central bank this week raised its benchmark Selic rate to 9% from 8.5%, its third consecutive half-a-percentage-point rise. The hike comes hard on the heels of last week’s announcement that the bank would commit $60 billion for the rest of this year to intervening in the foreign-exchange markets to prop up the real. The currency has dropped by some 18% against the dollar this year, though these latest measures have reversed the trend at least temporarily.
A weaker real raises the value of Brazil’s imports and the cost of debt-servicing for local companies. Consumer price inflation in June was running at an annualized rate of 6.27%. While that is within the central bank’s expansively broad target range of 2.5%-6.5%, it is well above the bull’s-eye the government is trying to hit of 4.5%.
The real continues to be vulnerable to the global rout of emerging-market currencies triggered by the U.S. Federal Reserve starting to wind down its stimulus. Investors are also deterred by the supply-side bottlenecks in the economy that this government, like its predecessors, has failed to clear. Further rises in interest rates look likely, possibly to as high as 10% by the end of this year, with growth being allowed to fall to where it will.