Brazil Central Bank Continues to Raise Rates Aggressively, Another 150bp to 9.25% in December

Banco Central do Brasil​ again aggressively hiked its benchmark interest rate by 1.5% to 9.25%. It was the seventh consecutive interest rate hike in 2021 and policymakers see another interest rate increase by the same margin at the next meeting. 

Brazil Real
Brazilian Real

Last meeting the Brazilian Central Bank raised 50bp to 7.75% saying the underlying inflation is above the range compatible with meeting the inflation target.

Highlights

  • Copom increases the Selic rate to 9.25% p.a.
  • The committee said that accordingly to the balance of risky it is appropriate for the tightening cycle to advance significantly into the restrictive scenario, in order to consolidate a disinflation process and anchor the expectations.
  • Both the forecasts from the monetary authority and the market participants show that inflation in 2022 could come near to the upper bound of the central bank target (5%).
  • The policymaker said that recent questioning regarding the fiscal framework increased the risk of deanchoring inflation expectations.
  • Recent growth indicators released since the last meeting showed a slightly worst than expected performance for the economy. 
Brazil Interest Rate
Brazil Interest Rates

Inflation

  • Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are around 10.2%, 5.0%, and 3.5%, respectively; And
  • Copom’s inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.65* and evolving according to the purchase power parity (PPP), stand around 10.2% for 2021, 4.7% for 2022 and 3.2% for 2023.
  • This scenario assumes a path for the Selic rate that rises to 9.25% in 2021 and to 11.75% during 2022, ending the year at 11.25%, and drops to 8.00% during 2023. In this scenario, inflation projections for administered prices are 16.7% for 2021, 3.8% for 2022, and 5.2% for 2023.
  • The energy flag is “water scarcity” in December 2021 and is assumed to be “red level 2” in December of 2022 and 2023.

08 December2021

Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement December 2021

In its 243rd meeting, the Copom unanimously decided to increase the Selic rate to 9.25% p.a.

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

  • Regarding the global outlook, the environment became less favorable.  Some central banks in advanced economies expressed more clearly the need for caution given the increased persistence of inflation, turning the environment more challenging for emerging economies. In addition, the possibility of a winter Covid-19 wave and the emergence of the Omicron variant add uncertainty about the pace of recovery in advanced economies;
  • Turning to the Brazilian economy, growth indicators released since the last meeting once more posted an evolution moderately below expected;
  • Consumer inflation remains high. Price increases were higher than expected, 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 2021, 2022, and 2023 collected by the Focus survey are around 10.2%, 5.0%, and 3.5%, respectively; And
  • Copom’s inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.65* and evolving according to the purchase power parity (PPP), stand around 10.2% for 2021, 4.7% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 9.25% in 2021 and to 11.75% during 2022, ending the year at 11.25%, and drops to 8.00% during 2023. In this scenario, inflation projections for administered prices are 16.7% for 2021, 3.8% for 2022, and 5.2% for 2023. The energy flag is “water scarcity” in December 2021 and is assumed to be “red level 2” in December of 2022 and 2023.

The Committee emphasizes that risks to its baseline scenario remain in both directions.

On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in the baseline scenario.

On the other hand, further extensions of fiscal policy responses to the pandemic that increase aggregate demand and deteriorate the fiscal path may pressure the country’s risk premium.

In spite of the more positive public accounts data, the Committee assesses that doubts regarding the fiscal framework increase the risk of deanchoring inflation expectations, keeping the upward asymmetry in the balance of risks. This implies a higher probability of inflation paths above the one projected under the baseline scenario.

Taking into account the baseline scenario, the balance of risks, and the broad array of available information, the Copom unanimously decided to increase the Selic rate by 1.50 p.p. to 9.25% p.a. The Committee judges that this decision reflects its baseline for scenario prospective, a 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 2022 and 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 the increase in its inflation projections and in the risk of a deanchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory. The Committee will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate.

For the next meeting, the Committee foresees another adjustment of the same magnitude. 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, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.

The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio Kanczuk, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sérgio Neves de Souza.

*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.

Source: Banco Central Do Brasil

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