So the Brazilian government has recognized the threat of inflation and has started a new cycle of interest hikes. The quarter point adjustment announced by Central Bank President Trombini last week ends a cycle of record low interbank rates. However, market expectation had been for a half point increase and some are questioning the autonomy of the Central Bank. (Formally, it is not autonomous but has acted in a fairly independent manner over the period of the Real.) So although reactions have been somewhat muted, the move favors banks and finance capital. As typical of Brazil, the move was also related to scandal with a rumored leak of the adjustment to a major player in the meat industry. This player is said to have made a major killing on the future’s market by using the insider information. The CVM, (Brazil’s SEC) should investigate but probably won’t.
The implications for the broader economy are that with a new cycle of interest hikes, the consumer economy will weaken. I am not convinced at this point that that is the case. There is so much activity in the informal sector that does not get recorded which can keep consumers afloat for a while yet. Also with Brazil’s inflation running at close to 7%a.a., real interest rates are still perceived as low by consumers and because margins are so high on products sold in Brazil, everyone can keep playing the game at least for a while.
On the other hand, the move will make people think about new investments and there is still so much uncertainty that projects will continue to be put off or slow paced. None of this is new in Brazil and people will keep moving on.
In general, there is a mixture of extreme optimism and extreme cynicism co-mingling in the same person and same class. We express horror at paying maids 25 dollars a day and having to legally register them as employees with rights. At the same time, we feel bad for the poor and wish that the government would just clean up “cracolandia” in downtown Sao Paulo.
President Dilma continues to navigate in choppy waters without much direction and policy decisions are looking increasingly adhoc and reactive. But God is Brazilian so no worries except for the fact that the Pope is Argentine.