Brazil’s economy accelerated 6.2% year-on-year in the last quarter of 2007, pushing growth to a solid 5.4% for the year. Fixed capital expenditure and domestic consumption buoyed by 29% credit expansion were drivers of the economy’s expansion. Private consumption grew 8.6% year-on-year while fixed investment increased 13.4% in 2007. These drivers offset sagging exports at 6.6% compared with net imports of 20.7% last year. The central bank struck a hawkish tone in minutes released from its latest policy meeting, indicating a monetary tightening cycle maybe on the cards to fight inflation.
Private capital outflows of $51 billion hit Russia in the first two months of the year, as global risk aversion and tightened liquidity kicked in. This may ease the central bank’s inflation-fighting mission, as it considers whether to hike local interest rates, which would push up re-financing costs, or to allow the rouble to strengthen. Nevertheless, foreign financial institutions are still stepping up exposure to Russian risk with HSBC announcing a further $200m investment drive this year, while Barclays acquired Expobank for $745m last week.
Romania’s annual inflation in February rose to a 2-year high of 8% propelled by high commodity prices and risk aversion that has weakened the strength of the leu. Analysts predict an aggressive 100bp hike could be on the way as EMEA is held hostage to increasing pricing pressures. Inflation in March is forecast at 8.3%, well above the central bank’s 2.8-4.8% target range.
The Bank of Israel this week intervened in the foreign exchange market, buying dollars to ward off the appreciation of the shekel. The shekel strengthened 3.95% against the dollar early this week and was trading at 3.45 – the highest in a decade. “The intervention is unlikely to change the trend of shekel strength because the strength of the shekel is partially caused by dollar weakness, and aggressive policy easing by the Federal Reserve, which is beyond the central bank's control (and) the fundamentals for shekel strength are strong, with the currency still reasonably weak on a real trade weighted basis,” Lehman Brothers said in a research note. Also this week Moody’s announced it was placing the A2-rated sovereign on review for a possible upgrade.