Monetary Policy in Brazil and Argentina

For Danske Bank, monetary policy in Brazil should remain expansionist in 2007 and interest rates may decline to 10.75% by the end of 2007. The BRL appreciation has fostered carry trade and has not led to a decrease in exports in Brazil. The appreciation of domestic currency may have negative impacts on the trade balance, both through a decrease in exports and increase in imports.

Danske reports that the Central Bank of Argentina is targeting inflation by controlling money supply growth (M2). For the bank: “high inflation will keep money supply growth close to the limit of monetary policy band”. At the same time, the peso is pegged to the dollar, suggesting that the Central Bank is also targeting the exchange rate.