Wednesday, April 27, 2005

Brazil's monetary policy dilemma

Brazil's central bank is trying to meet its inflation target of 5.1% this year, but there are plenty of obstacles. Not only are oil prices pressuring inflation, but the currency keeps wanting to appreciate, in part thanks to the great balance of payments situation in which the country finds itself.

There can also be too much of a good thing. The new-found economic stability, microeconomic reforms such as a new bankruptcy code, and a new program that allows consumers to borrow and have installment payments deducted from pay are all working together to create a lending boom. Sales of durable goods are sky-rocketing.

All this means the central bank might have to keep policy tight for longer than people expect.


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