Central Bank of Brazil raises rates for fifth time in row

The Central Bank of Brazil has re-enforced its commitment to rein in inflation by raising interest rates for a fifth consecutive time.

In a unanimous and widely expected decision, the bank's monetary policy committee voted to increase Brazil's benchmark Selic rate by 50 basis points to 9.5% – 2.25 percentage points higher than in April, when the bank's inflation-combating campaign was launched.

The Central Bank of Brazil has been fighting a two-front war in recent months, trying to curb price pressures while maintaining economic growth. Inflation, which peaked at 6.7% in July, has since subsided but is still close to 6%. Growth, meanwhile, has slowed with recent data predicting economic expansion of just 2% this year.

The real has stabilised since market expectations of scaled back asset purchases in the US caused emerging market currencies to depreciate this summer (a US dollar now buys 2.21 real, compared to 2.45 on August 21), but fears that a looming taper will add to inflation pressures by driving up import prices still persist.

Last month, the International Monetary Fund voiced support for the Central Bank of Brazil's belt-tightening strategy, stating that "a tighter policy stance would help address persistent price pressures, safeguard confidence in policy frameworks and set the stage for a medium-term rebalancing of demand away from consumption".

RBI eases ‘exceptional measures'

Meanwhile, the Reserve Bank of India (RBI) has continued to withdraw measures introduced at the height of the emerging market turmoil in July and August to stabilise the exchange rate and financial markets.

The central bank reduced its marginal standing facility (MSF) rate (at which banks can borrow overnight from the RBI) by 50 basis points to 9%, and said it would begin selling repos with one- and two-week maturities on a weekly basis, starting this Friday.

The RBI introduced several "exceptional liquidity measures" this summer, including raising the MSF rate from 8.25% to 10.25%, three percentage points above the repo rate. It began efforts to "normalise liquidity conditions" last month by reducing the MSF rate by 75 basis points and conducting open market purchase operations of 9,974 crore rupees ($1.61 billion) – measures that Raghuram Rajhan, the RBI governor, said were "warranted" given improving external conditions.