Now that the minutes of the March Monetary Policy Committee (“Copom”) have been

released, we know that everyone on the Committee was in favor of a rise in interest
rates, but there was a timing difference between the members that was reflected in the 5
to 3 vote. The majority were happy to wait until the April meeting to see the effects of
the re-institution of i) the full value of IPI on vehicles and white goods, and ii) the
compulsory deposits that banks are required to keep with Banco Central, to see whether
those events will assist in containing demand. The minority, however, wanted an
immediate increase, probably on the basis that any increase in the Selic rate takes
several months to work its way through the economy.

The problem is that Brazil’s 2010 goal is 4.5% p.a. consumer inflation, and as of the
end of March, accumulated inflation has already hit 2.08%.

Figure 1
IPCA
January 09 - March 10
0,9
0,8
0,7
% per month

0,6
0,5
0,4
0,3
0,2
0,1
0
de 9
m 9

m 0
m 9
9

0
no 9
9

09
09

09

10
ag 9

0
0

1
/0

/1
r/0

t/0
0
/0

t/0
l/ 0

v/
v/

v/
o/

z/

n/
n/

n/
ar

ar
ai
ab

se

ou
ju
fe

fe
ja

ju

ja

Source: IBGE

The graph above shows the extent of the short-term problem, with January, February
and March, 2010 being the three highest months of the fifteen month period. (The IPCA
rate for February 2009, was the same as for March 2010.) The rates for January
(0.75%) and February (0.78%) were more than double the average rate for 2009
(0.35%). It will be noted that inflation in March is projected to be 0.55%, a significant
reduction from January and February, but still an annual rate of 2% above the goal. So
Copom will almost certainly decide to raise interest rates to dampen demand and bring
inflation back into line.

Figure 2
Selic
Jan 2009 - Mar 2010
1,2

1
% per annum

0,8

0,6

0,4

0,2

0
ja

ju 9

se 9

ou

ja
fe

ab 9

ju

ag

no

de 9

fe

m
n

n/
n/

l/0
v/

v/
ar

ai

ar
t/0

t/
r/

z/
v/
/0

1
09

09

1
09

/0

/0
/0

09

/1
9

09
9

The Selic (overnight) interest rate is currently 8.74% p.a. and will likely be increased to
9.25% p.a. in April, or even 9.5% p.a. Figure 2, above, shows the decline of Selic
throughout 2009, reaching its lowest level 0.64% per month in February 2010. The up
tick in the March 2010 rates is the market anticipating the higher rates in April.