Brazil Central Bank Aggressively Raises Rates for Eleventh Consecutive Time, another 50bp to 13.25%, Signals More to Come

Banco Central do Brasil​ again aggressively hiked its benchmark interest rate by .50% to 13.275%. It was the tenth consecutive interest rate hike since 2021 when the bank began its current tightening cycle early last year, the Selic was at a record low 2%. The impact is being felt, last week, Brazil’s 12-month inflation rate declined for the first time in 2022 in May, and retail sales increased in April at the slowest pace so far this year. The lending rate is now at its highest level since 2017. The bank’s monetary policy committee (Copom) said it expects to raise the Selic signaled in August again.

Brazil Real
Brazilian Real

Inflation Rampant

Inflation is the issue of concern. Annual inflation stood at 11.73% in May, well above targets of 3.5% for this year and 3.25% for 2023. Inflation is rising at the fastest pace since 2015. Droughts in some areas of Brazil and excessive rains in others hit crops and pushed prices for food higher.

The institution’s monetary policy committee on Wednesday voted unanimously for a 50-basis points hike, as expected by economists, taking the Selic benchmark to 13.25 per cent, its highest level in five years.

President Jair Bolsonaro’s administration is also working to bring down the inflation rate ahead of presidential elections in October, partly by requiring states to reduce their taxes on fuels. Any tax cuts would help bring inflation down earlier, but postpone some price pressure until after the voting, while the elections also introduce an element of uncertainty, said Necton Investimentos brokerage in São Paulo.

“It is appropriate that the monetary tightening cycle continues to advance significantly into even more contractionary territory,” the BCB said in a statement.

The US Federal Reserve raised rates by three quarters of a percent at their June meeting earlier today. This was the second time the bank raised rates this much since May 2000 when the Fed was led by Alan Greenspan. The Central Bank raised interest rates by 0.50% (to a target of 6.5%) back then. That was the last time the Fed would ever raise interest rates by that much in one move until last meeting.

Brazil’s 12-month inflation rate has remained above 10% since September. Expectations that pressure on prices would start to ease early this year have been dashed by the impact of the war in Ukraine on oil prices and grain prices. Last month Brazil’s state-controlled oil company, Petróleo Brasileiro SA, raised its wholesale price for gasoline by 19% and the price for diesel fuel by 25%.

Brazil’s gross domestic product will likely contract in the third quarter on the eve of elections, according to a Bloomberg survey of economists published in May. 

The Brazilian real has risen 9% against the dollar this year with the higher interest rates attracting investors. The strengthening has softened the impact of imports, including oil, on inflation but not enough given the magnitude of the rise in prices.

Brazil Interest Rate
Brazil Interest Rates

15 June 2022

Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement June 2022

In its 247th meeting, the Copom unanimously decided to increase the Selic rate to 13.25% p.a.

The following observations provide an update of the Copom’s scenario:

  • The global environment has deteriorated further, marked by downward revisions on prospective global growth in an environment of strong and persistent inflationary pressures. The tightening of financial conditions due to the repricing of monetary policy in advanced countries, as well as the rise in risk aversion, increases uncertainty and generates additional volatility, particularly in emerging economies;
  • Turning to the Brazilian economy, the set of indicators released since the previous Copom meeting suggests a rate of growth above the Committee’s expectations;
  • Consumer inflation continued to surprise negatively, both in volatile components and items associated with core inflation;
  • The various measures of underlying inflation are above the range compatible with meeting the inflation target;
  • Inflation expectations for 2022, 2023 and 2024 collected by the Focus survey are around 8.5%, 4.7% and 3.25%, respectively; and
  • In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 4.90* and evolves according to the purchasing power parity (PPP). This scenario assumes a path for the Selic rate that ends 2022 at 13.25%, falls to 10.0% in 2023 and 7.50% in 2024. The Committee decided to keep the assumption that oil prices follow approximately the futures market curve for the following six months, ending the year at USD 110/barrel, and then start increasing 2% per year in January 2023. Moreover, the energy flag is assumed to be “yellow” in December 2022, 2023 and 2024. In this scenario, Copom’s inflation projections stand at 8.8% for 2022, 4.0% for 2023 and 2.7% for 2024. Inflation projections for administered prices are 7.0% for 2022, 6.3% for 2023 and 3.3% for 2024. The projections based on the reference scenario do not incorporate the tax measures on energy and telecom prices under the approval process. The Committee judges that the uncertainty in its assumptions and projections is higher than usual and has increased since the previous meeting.

The Committee emphasizes that risks to its scenarios remain in both directions. Among the upside risks for the inflationary scenario and inflation expectations, it should be emphasized (i) a greater persistence of global inflationary pressures; and (ii) an increase in the risk premium due to the uncertainty about the country’s future fiscal framework and fiscal policies that support aggregate demand, partially incorporated in inflation expectations and asset prices. Among the downside risks, it should be noted (i) a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency; and (ii) a greater deceleration of economic activity than projected. The Committee assessed that the tax measures under the approval process imply a sizable reduction in inflation in the current year, although it raises by a smaller magnitude inflation in the relevant horizon for monetary policy. The Committee assesses that the uncertain and volatile current scenario requires serenity when evaluating the risks.

Taking into account the assessed scenarios, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 0.50 p.p. to 13.25% p.a. The Committee judges that this decision reflects the uncertainty around its scenarios for prospective inflation, an even higher-than-usual variance in the balance of risks and is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes 2023. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

The Committee considers that, given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process consolidates and anchors expectations around its targets.

For its next meeting, the Committee foresees a new adjustment, of the same or lower magnitude. The Committee stresses that the growing uncertainty of the current scenario, coupled with the advanced stage of the current monetary policy cycle, and its impacts yet to be observed, require additional caution in its actions. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, the balance of risks, and inflation expectations and projections for the relevant horizon for monetary policy.

The following members of the Committee voted for this decision: Roberto de Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Diogo Abry Guillen, Fernanda Magalhães Rumenos Guardado, Maurício Costa de Moura, Otávio Ribeiro Damaso, Paulo Sérgio Neves de Souza and Renato Dias de Brito Gomes.

Note: This press release represents the Copom’s best effort to provide an English version of its policy statement. In case of any inconsistency, the original version in Portuguese prevails.

Source: Banco Central Do Brasil

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