Brazil Central Bank Aggressively Raises Rates For Tenth Consecutive Time, Another 100bp to 12.75%, Signals More To Come

Banco Central do Brasil​ again aggressively hiked its benchmark interest rate by 1.0% to 12.75%. 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 lending rate is now at its highest level since 2017. The bank’s monetary policy committee (Copom) said it expects to raise the Selic by a smaller magnitude.

Brazil Real
Brazilian Real

Inflation is the issue of concern. The institution’s monetary policy committee on Wednesday voted unanimously for a 100-basis points hike, as expected by economists, taking the Selic benchmark to 12.75 per cent, its highest level in five years.

“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 a half of a percent at their May meeting earlier today. This was the first 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 day.

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%.

Consumer prices in Brazil touched 12 per cent in the middle of April on a 12-month basis, according to official data. 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 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

Inflation

  • The various measures of underlying inflation are above the range compatible with meeting the inflation target;
  • Inflation expectations for 2022 and 2023 collected by the Focus survey are around 7.9%, and 4.1%, respectively; and
  • In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 4.95* and evolves according to the purchasing power parity (PPP). The Committee decided to keep the assumption that oil prices follow approximately the futures market curve until the end of 2022, ending the year at USD 100/barrel, and then start increasing 2% per year in January 2023.
  • The energy flag is assumed to be “yellow” in December of 2022 and 2023. In this scenario, Copom’s inflation projections stand at 7.3% for 2022 and 3.4% for 2023. Inflation projections for administered prices are 6.4% for 2022 and 5.7% for 2023. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.

4 May 2022

Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement May 2022

In its 246th meeting, the Copom unanimously decided to increase the Selic rate to 12.75% p.a.

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

  • The global environment has deteriorated further. Inflationary pressures arising from the pandemic period have intensified due to supply problems related to the new wave of Covid-19 in China and the war in Ukraine. The repricing of monetary policy in advanced countries 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 in line with the Committee’s expectations;
  • Consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and on the 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 and 2023 collected by the Focus survey are around 7.9%, and 4.1%, respectively; and
  • In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 4.95* and evolves according to the purchasing power parity (PPP).  The Committee decided to keep the assumption that oil prices follow approximately the futures market curve until the end of 2022, ending the year at USD 100/barrel, and then start increasing 2% per year in January 2023. The energy flag is assumed to be “yellow” in December of 2022 and 2023. In this scenario, Copom’s inflation projections stand at 7.3% for 2022 and 3.4% for 2023. Inflation projections for administered prices are 6.4% for 2022 and 5.7% for 2023. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.

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, 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 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 1.00 p.p. to 12.75% 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 convergence of inflation to 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 as likely an extension of the cycle, with an adjustment of lower magnitude. The Committee stresses that the heightened uncertainty of the current scenario, 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.

*Value obtained according to the usual procedure of rounding the average USD/BRL exchange rate observed on the five business days ending on the last day of the week before the Copom meeting.

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.

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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