Rate hikes only to increase Brazil and Real’s pain

• Brazil's central bank raised interest rates by 50 basis points to 12.75 percent to contain the inflationary pressure.
• Inflation exceeds the central bank's target of 4.5 percent (with 2 percent range) to annualized 7.14 percent.
• In January inflation grew at 1.24 percent mom.

Economy at a glance -

• Economy is slowing down since 2014. Second quarter GDP was -0.9 percent and third quarter -0.2 percent, putting the country in technical recession.
• Interest rates are at twelve year high.
• Unemployment rate hovering above the level of 2014 to 5.3 percent.
• Trade balance deteriorating since September 2014 and current stands at $ -2.84 billion
• Terms of trade deteriorating at faster pace since the latter half of 2011.

Impact -

• Brazilian currency is trading close to 3 against the dollar, a level not seen since 2004.
• Brazilian stock index has fallen close to 20 percent since September last year.

 These trends could continue further.

 Why?

• As the Federal Reserve is going to raise rates this year the pain could be more acute.
• Raising the rates in Brazil would increase the pain of Brazilian companies as the falling real has contributed more towards inflation than domestic factors.
• Brazil needs reforms over its tax policy and evasion, exports and fiscal policy and until such happens raising interest rates would be a temporary relief.