Intervention Necessary, Not Sufficient

The intervention in major real estate financing businesses by the U.S. Federal Government announced at the beginning of the month is a necessary, but probably not sufficient step toward overcoming the international crisis, according to a Brazilian Central Bank analysis.

This information comes from a report from the latest meeting of Copom (Committee on Monetary Policy of the Central Bank), where the Central Bank increased the basic interest rate from 13% to 13.75% per year.

The appraisal was made before the new interventions announced this week. In addition to the nationalization of mortgage companies Fannie Mae and Freddie Mac, the U.S. Treasury this week loaned money to insurer AIG. Also this week, Lehman Brothers bank declared bankruptcy.

The Central Bank believes that the appreciation of the dollar and the increase in “risk aversion” that brought down international markets makes the decision about basic interest rates more complex.

Regarding effects on Brazil, the Central Bank says that the country’s adopted policies contribute to reducing, although not eliminating the difficulties.

“However, the policies adopted to reduce the economy’s external vulnerability have proven successful, contributing to mitigate, although not eliminate, the effects of troubles in the external scene on economic activity within Brazil, whose dynamism has been sustained essentially by domestic demand,” says Copom in its report.

According to the Central Bank, the word economy continues to exhibit conflicting pressures, with clearer signs of a recession accompanied by even higher rates of inflation.

“The data revealed in the last few weeks points to a more intense weakening of activity in developed countries’ economies.”