Brazil Central Bank Continues to Raise Rates Aggressively, Another 100bp to 11.75%, Signals More To Come

Banco Central do Brasil​ again aggressively hiked its benchmark interest rate by 1.0% to 1`1.75%. It was the ninth consecutive interest rate hike since 2021 since the bank began its current tightening cycle early last year, when 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 the same amount at its next meeting.

Brazil Real
Brazilian Real

Inflation is the issue of concern. “The Committee considers that, given its inflation projections and the risk of a de-anchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into an even more restrictive territory,” the bank said in a statement. The US Federal Reserve raised rates for the first time since 2018 earlier by 25 basis points.

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 week 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 rose 1.01% in February, the fastest pace for that month since 2015, and increased 10.54% from a year earlier. 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 inflation target for 2021 was 3.75%, with a tolerance range from 2.25% to 5.25%, and the figure came in at 10.06%.
  • For 2022, the target drops to 3.5% with a tolerance range of 2% to 5%, and the median forecast in the central bank survey is for inflation of 6.45% this year.
  • The survey’s forecast for 2023 is for inflation of 3.7%, above the bank’s 3.25% target but within the 1.75% to 4.75% target range.
  • The central bank needs to keep the figure within the range to maintain its hard-won credibility.

16 March 2022

Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement March 2022

In its 245th meeting, the Copom unanimously decided to increase the Selic rate to 11.75% p.a.

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

  • Regarding the global outlook, the environment has deteriorated significantly.  The conflict between Russia and Ukraine has led to a strong tightening in financial conditions and higher uncertainty surrounding the global economic outlook. In particular, the supply shock resulting from the conflict has the potential of increasing inflationary pressures, which had already been rising both in emerging and advanced economies;
  • Turning to the Brazilian economy, GDP growth in 2021Q4 came in higher than expected;
  • 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 6.4%, and 3.7%, respectively;
  • The Copom’s inflation projections in its reference scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.05* and evolving according to the purchasing power parity (PPP), stand at 7.1% for 2022 and 3.4% for 2023. This scenario assumes a path for the Selic rate that rises to 12.75% in 2022 and declines to 8.75% during 2023. In this scenario, inflation projections for administered prices are 9.5% for 2022 and 5.9% for 2023. The energy flag is assumed to be “yellow” in December of 2022 and 2023; and
  • Given the recent volatility and the impact on its inflation projections due to the usual assumption for the oil price in USD**, the Committee has also decided to adopt, at this moment, an alternative scenario. This scenario, considered of higher probability, assumes 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. In this scenario, Copom’s inflation projections stand at 6.3% for 2022 and 3.1% for 2023.

The Committee emphasizes that risks to its scenarios 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 its scenarios.

On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country’s risk premium.

In spite of the more favorable public accounts data, the Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations, but considers that this risk is being partially incorporated in the inflation expectations and asset prices used in its models. The Committee maintains the assessment of an upward asymmetry in the balance of 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 11.75% 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 2022 and, mainly, 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 an even more restrictive territory.

The Committee’s actions aim at curbing the second-round effects of the current supply shock in several commodities, which appear in inflation in a lagged manner. The current projections indicate that the interest rate cycle in its scenarios is sufficient for inflation convergence to levels around the target over the relevant horizon. The Copom judges that the moment requires serenity to assess the size and duration of the current shocks. If those shocks prove to be more persistent or larger than anticipated, the Committee will be ready to adjust the size of the monetary tightening cycle. The Committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate.

For its 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, Fernanda Magalhães Rumenos Guardado, 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.

**Values around the oil price average in the week before the Copom meeting and, after that, a 2% change per year.

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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