Brazil Central Bank Left Rates Steady at 13.75%, Delete Reference to Possibly Resuming Hiking

Banco Central do Brasil​ kept its benchmark interest rate unchanged in June 2023, in line with market expectations. The board guidance emphasized “patience and serenity in the conduct of monetary policy” while deleting reference to possibly resuming the tightening cycle. Further hike risk is therefore gone at this point but the central bank is not yet paving the way for nearer term easing.

Brazil Real
Brazilian Real

The Central Bank last year aggressively hiked its benchmark interest rate with twelve consecutive interest rate hikes 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.

Annual inflation eased to 4.65% in March from 5.6% in February 2023, while the bank’s Inflation expectations are 5.0% for 2023 and 3.4% for 2024. Inflation projections for administered prices are 9.0% for 2023 and 4.6% for 2024.

Highlights

  • The bank held the Selic at 13.75% late on Wednesday, holding a monetary tightening cycle that’s increased borrowing costs by 11.75 percentage points since March 2021.
  • Result was a unanimous decision.
  • The move was expected.
  • Copom’s inflation projections in the reference scenario stand at 5.0% for 2023 and 3.4% for 2024.
  • Inflation projections for administered prices are 9.0% for 2023 and 4.6% for 2024.
Brazil Interest Rate
Brazil Interest Rates


Banco Central Do Brasil Comitê de Política Monetária (Copom)

Monetary Policy Statement June 21, 2023

Copom left the Selic rate to 13.75% p.a.

In its meeting the Copom decided to maintain the Selic rate at 13.75% p.a.

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

The global environment remains challenging, albeit with some positive revisions on output growth for the year. Despite some attenuation on the stress involving banks in the US and Europe, the situation still requires monitoring. The central banks of major economies remain committed to bringing inflation back to its targets, in some cases by resuming the hiking cycles, in an environment in which inflation has been resilient.

Regarding the domestic scenario, the recent set of indicators of activity remains consistent with the scenario of economic deceleration for the next quarters. Growth in the first quarter was stronger than expected due mainly to the agricultural sector. Notwithstanding the recent reduction of headline consumer inflation, the Committee anticipates an increase in the twelve-month headline inflation over the second half of the year. Moreover, various measures of underlying inflation remain above the range compatible with meeting the inflation target. Inflation expectations for 2023 and 2024 collected by the Focus survey have reduced and are around 5.1% and 4.0%, respectively.

Copom’s inflation projections in the reference scenario* stand at 5.0% for 2023 and 3.4% for 2024. Inflation projections for administered prices are 9.0% for 2023 and 4.6% for 2024.

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; (ii) some residual uncertainty about the final fiscal framework to be approved by the National Congress and, more relevant for monetary policy, its impacts on the expected paths of the public debt and of inflation expectations, and on risky assets; and (iii) a larger or more persistent deanchoring of long-term inflation expectations. Among the downside risks, it should be noted (i) an additional reduction in the prices of international commodities measured in local currency, even though a sizeable portion of this movement has already been observed; (ii) a greater than projected deceleration of global economic activity, particularly due to adverse conditions in the global financial system; and (iii) a slowdown in domestic credit concession larger than what would be compatible with the current stance of monetary policy.

Considering the assessed scenarios, the balance of risks, and the broad array of available information, Copom decided to maintain the Selic rate at 13.75% p.a. and judges that this decision is consistent with the strategy for inflation convergence to a level around its target throughout the relevant horizon for monetary policy, which includes the year of 2024. Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment.

The current context, characterized by a stage in which the disinflationary process tends to be slower and in an environment of deanchored inflation expectations continues to require caution and parcimony. Copom reaffirms its commitment to set monetary policy to meet the targets and judges that the strategy of maintaining the Selic rate for a long period has been adequate to ensure the convergence of inflation. The Committee emphasizes that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets. The Committee judges that the current scenario demands patience and serenity in the conduct of monetary policy and reminds that the future steps of monetary policy will depend on the inflationary dynamics, especially the components that are more sensitive to monetary policy and economic activity, on inflation expectations, in particular the longer-term ones, on its inflation projections, on the output gap, and on the balance of risks.

The following members of the Committee voted for this decision: Roberto de Oliveira Campos Neto (Governor), 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.

  • In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 4.85 and evolves according to the purchasing power parity (PPP). 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 “green” in December 2023 and 2024. The value for the exchange rate is 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.

Source: Banco Central Do Brasil

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