New, Post Crisis Phase in Evidence

The Monetary Policy Committee (“Copom”) of Brazil’s Central Bank took action
yesterday and raised the basic interest rate (Selic) from 8.75% to 9.5%, a jump of 0.75%.
The rise in the rate was expected by some at the last meeting of Copom in March where a
majority decision of five to three kept rates unchanged for one more month. However, it
was understood at the time that a rise was inevitable in April. The only question was how
much of a rise, and the market predicted 0.5% up to the point, earlier this week that
Central Bank President, Henrique Meirelles made reference to “strong measures” that
were needed to hold back price increases. Thus, most analysts saw this as an indication
that the rise would be at the 0.75% level.

Indeed, the issue of inflation has been on the minds of many commentators as the rate of
consumer inflation (IPCA) has reached 2.05% for the first quarter of 2010. Comparative
numbers for IPCA are shown in the chart below.

Monthly % 2008 2009 2010

January 0.54 0.48 0.75
February 0.49 0.55 0.78
March 0.48 0.20 0.52
Qtly Total 1.51 1.23 2.05
Source: IBGE

There are some commentators that like to see economic decisions as the result of disputes
between Banco Central and the Ministry of Finance. Indeed, Guido Mantega, the
Minister of Finance has made reference on various occasions to the current spike in
inflation as being the result of “temporary factors”. However, information from many
sectors, including transportation, education and retail indicates that inflation is resisting
slowing down, and thus Banco Central has moved to take the action of yesterday.

The consensus in the press is also that the new phase of post-crisis monetary policy will
not stop with the current increase which will not do a great deal by itself to restrict
consumption. Thus, we may expect another rise in interest rates next month of a similar
size to that we saw yesterday, and the ultimate accumulated rise from the 8.75% level
could be 11.75% or more. The idea being that the inflation goal of the government of
4.5% in 2010 is essentially unattainable at this point, and therefore the goal will e to keep
inflation as close to 5.0% as possible.

The political implications of this rate increase and future ones is also interesting in the
context of the Presidential election. On the one hand, President Lula is helping his
candidate, Dilma Rousseff by pointing to his responsible handling of the economy. On
the other hand, however, the object of the action is to slow down consumption in an
overheated economy, which if it were to continue unabated, would likely work to the
benefit of the Government and its candidate in the short term.