In an age where central bankers are attempting to increase transparency in the policy making decision process the Brazilian central bank gave a prime example of how not to conduct monetary policy communications when it unexpectedly slashed interest rates by 0.50%.
Leading up to today’s 50 bp interest rate cut the Central Bank of Brazil had increased interest rates in its last five consecutive meetings to a rate of 12.5%. The central bank cited the risks for lower potential growth in the global economy which could bring a bout of disinflationary forces. Copcom said the “moderate adjustment” in the interest rate is consistent with inflation expectations in 2012.
When comparing today’s move with those of the world’s two leading central banks the Fed and the ECB the contrasts are startling. Central bank policy is sometimes compared to that of an aircraft carrier making a 180 degree turn rather than a two propeller speed boat. Wording is carefully chosen. Former Fed Chairman Alan Greenspan was famous for hour long speeches which could leave analysts guessing if the Fed chief’s wording hinted at a hawkish or dovish monetary policy. Ben Bernanke learned the hard way early in his tenure as Fed Chairman when an off the cuff comment at a dinner to Maria Bartiromo caused the stock market to tumble once his comments were published. The ECB is famous for its traffic light system indicating its intention to adjust interest rates.
In a day and age when the Federal Reserve Chairman has increased transparency by opening the floor to questions from reporters, how does the Central Bank of Brazil explain its preemptive strike in the currency war from a tightening cycle to a loose monetary stance without providing the markets with any warning? Both FX and rates traders will have to wait for the release of the central bank’s meeting minutes to get a glimpse in the Copcom’s thinking. Until then more volatility may be seen in both the yield curve and in the rate of the Brazilian real. A couple assumptions can be taken from this policy move; inflation expectations are declining in both developed economies (UK) and in the emerging economies (Brazil). Perhaps Brazil is betting on a global recession in which inflationary pressures play second fiddle to that of steady growth rates.
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