Brazil risks recession as central bank bucks global trend, raises rate

Thu Jan 22, 2015 3:17pm EST
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By Walter Brandimarte and Silvio Cascione

SAO PAULO/BRASILIA (Reuters) - Brazilian President Dilma Rousseff's crusade to win back investor confidence has entrusted policymakers with the tough mission of hiking interest rates while major central banks cut them, raising the prospect of another recession in Latin America's biggest economy.

As it boosted the benchmark Selic rate to 12.25 percent on Wednesday, the third consecutive rate hike since Rousseff won re-election in October, Brazil's central bank sought to deliver on its pledge to do "whatever it takes" to bring down inflation currently running at about 6.5 percent annually.

The move left the Brazilian central bank at odds with the European Central Bank, which unveiled a massive bond-buying program on Thursday, as well as policymakers in Canada, Denmark, India and Turkey, who recently cut interest rates after the sharp drop in oil prices and forecasts of slower global growth.

Brazil's strategy seems to be paying off, for now.

Investors, also encouraged by a package of austerity measures unveiled this week, have been cautiously buying government bonds and driving long-term interest rates lower.

The Brazilian real BRL= has gained 3 percent since the beginning of the year while returns on local-currency government bonds have totaled 4.9 percent in dollar terms during the same period, according to a benchmark JP Morgan index .JGEMCBB.

That has provided rare good news for Rousseff, who has otherwise been battered by a weak economy, plunging business confidence, energy blackouts and a corruption scandal since she began her second term on Jan. 1.

Javier Murcio, a Boston-based portfolio manager at Standish Mellon Asset Management, which oversees $10 billion in emerging market assets, said the fund was currently "slightly overweight" on Brazil's local currency debt.   Continued...

Brazilian President Dilma Rousseff speaks during breakfast with media at the Planalto Palace in Brasilia December 22, 2014. REUTERS/Joedson Alves