Banco Central do Brasil again aggressively hiked its benchmark interest rate by .50% to 13.75%. It was the twelth 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%. Brazil’s annual inflation stood at 11.39% in mid-July. 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 September again.
Highlights
- The bank lifted the Selic to 13.75% late on Wednesday, prolonging a monetary tightening cycle that’s increased borrowing costs by 11.75 percentage points since March 2021.
- In a statement, policy makers wrote that they will give more emphasis to price forecasts for early 2024 as recent tax changes leave more near-term estimates in flux.
- “The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” they wrote.
- “The Copom emphasizes that it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.”
- Brazil’s jobless rate has fallen to the lowest since December 2015 in a labor market recovery described by the central bank as “stronger than expected.”
- In the bank’s view, the international environment is “adverse and volatile, with marked downward revisions on prospective global growth.”
“The plan for September is either to keep rates steady or to raise them by 25 basis points,” said Fabio Kanczuk, a former central bank director who’s now head of macroeconomics at Asa Investments. “The outlook will continue to be difficult,” he said, adding that he expects the Selic to peak at 14.25%.
Inflation Rampant
Inflation is the issue of concern. Annual inflation stood at 11.39% in mid-July, 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.
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%.
Central bank estimates
- Consumer prices will rise 4.6% next year and 3.5% in the first quarter of 2024 on an annual basis
- Policy makers target inflation at 3.25% and 3% in 2023 and 2024, respectively.
- Despite headwinds to activity, economists surveyed by the central bank have raised their 2023 inflation estimates for 17 consecutive weeks, to 5.33%.
- They are also forecasting that borrowing costs will remain high for longer.
In Brazil forecasts are for the annual consumer-price print to come in at about 9.4%, down from 12.13% in April.
Recently, tax cuts provided short-term relief to transportation costs, and inflation has eased. On the other hand, congress passed a $7.6 billion social aid package that’s expected to support demand while the labor market firms.
President Jair Bolsonaro and his main rival, Luiz Inacio Lula da Silva, have both pledged to boost social aid if victorious in October’s election.
“The Committee assesses that the possibility that fiscal policies that support aggregate demand become permanent heightens the upside risks of the inflationary scenario,” board members wrote.
The US Federal Reserve raised rates by three quarters of a percent at their August 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.
Market Reaction
- Swap rates on the contract maturing in January 2023, which signal expectations for the key rate at year-end, slipped four basis points to 13.75% in morning trading on Thursday, while the contract due in January 2025 dropped 25 basis points.
- The real gained 0.3% to 5.2668 per dollar.
15 June 2022
Banco Central Do Brasil Comitê de Política Monetária (Copom)
Monetary Policy Statement August 3, 2022
Copom increases the Selic rate to 13.75% p.a.
In its 248th meeting, the Copom unanimously decided to increase the Selic rate to 13.75% p.a.
The following observations provide an update of the Copom’s scenario:
- The global environment remains adverse and volatile, with marked downward revisions on prospective global growth in an environment of inflationary pressures. The process of normalization of monetary policy in advanced economies has accelerated, affecting the prospective scenario and increasing the volatility of assets;
- Turning to the Brazilian economy, the set of indicators released since the previous Copom meeting continues to suggest that the economy grew throughout the second quarter, with the labor market recovery stronger than expected by the Committee;
- Consumer inflation remains high 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 7.2%, 5.3% and 3.3%, respectively; and
- In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.30* and evolves according to the purchasing power parity (PPP). This scenario assumes a path for the Selic rate that ends 2022 at 13.75%, falls to 11.00% in 2023 and 8.00% in 2024. The Committee assumes that oil prices follow approximately the futures market curve for the following six months and then start increasing 2% per year onwards. Moreover, the energy flag is assumed to be “yellow” in December 2022, 2023 and 2024. In this scenario, Copom’s inflation projections stand at 6.8% for 2022, 4.6% for 2023 and 2.7% for 2024. Inflation projections for administered prices are -1.3% for 2022, 8.4% for 2023 and 3.6% for 2024. The projections based on the reference scenario incorporate the tax measures recently approved. For the six-quarter-ahead horizon, which mitigates the calendar-year impact but incorporates the second-round effects of the tax measures that occur in 2022 and the first quarter of 2023, the 12-month inflation projection stands at 3.5%. 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 and additional fiscal stimuli 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 assesses that the possibility that fiscal policies that support aggregate demand become permanent heightens the upside risks of the inflationary scenario. On the other hand, the Committee notes that the rising risk of a greater global deceleration increases the downside risks to inflation. The Committee assesses that the still uncertain and volatile current scenario requires serenity when evaluating the prospective risks.
The Committee noted that inflation projections for the years of 2022 and 2023 were heavily impacted by temporary tax measures across calendar years. Therefore, the Committee decided at this moment to emphasize the projections for 12-month inflation in the first quarter of 2024, which reflects the relevant horizon, smoothens out the primary effects from tax changes, but incorporates their second-round effects on the relevant inflation projections for monetary policy decisions.
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 13.75% 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 strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes 2023 and, to a lesser extent, 2024. 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.
The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting. The Copom emphasizes that it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets. It also stresses that the uncertainty of the current scenario, both domestic and foreign ones, coupled with the advanced stage of the current monetary policy cycle, and its cumulative impacts yet to be observed, require additional caution in its actions.
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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