Banco Central do Brasil kept its benchmark interest rate unchanged after having aggressively hiked its benchmark interest rate by .50% to 13.75% last month. That move was the twelfth 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. Policy makers are seeing early signs of easing inflation, with the annual rate below 10% for the first time in a year.
The Brazil decision came just hours after the US Federal Reserve delivered its third consecutive increase of 75 basis points to interest rates, estimating they would reach 4.6% next year.
- 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 split decision, with two board members voting for a 25 basis-point hike.
- The move was forecast by 38 of 45 economists in a Bloomberg survey.
- Last scheduled policy meeting before the Oct. 2 election that is pitting President Jair Bolsonaro against leftist Luiz Inacio Lula da Silva, his main challenger
- 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 committee emphasizes that future steps of monetary policy may be adjusted, and it won’t hesitate to resume the tightening cycle in case the disinflation process doesn’t happen as expected,” policy makers wrote in a statement accompanying their decision.
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 had remained above 10% since September. Policy makers led by Roberto Campos Neto are seeing early signs of easing inflation, with the annual rate below 10% for the first time in a year. Transportation costs are declining on the back of fuel tax cuts that Bolsonaro has pushed for. Financial conditions are tightening.
The bank remains concerned about services prices as well as pressures stemming from consumer demand, which keeps firming as the government increases cash handouts before the election.
Central bank estimates
- Inflation expectations for 2022, 2023 and 2024 collected by the Focus survey are around 6.0%, 5.0% and 3.5%, respectively
- The exchange rate starts at USD/BRL 5.20* 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 2022, and “yellow” in December 2023 and 2024.
- In this scenario, Copom’s inflation projections stand at 5.8% for 2022, 4.6% for 2023 and 2.8% for 2024. Inflation projections for administered prices are -4.0% for 2022, 9.3% for 2023 and 3.7% for 2024.
- The Committee decided again to emphasize the six-quarter-ahead horizon, which reflects the relevant horizon, mitigates the primary effects from the tax changes but incorporates their second-round effects.
- On this horizon, which refers to the first quarter of 2024, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.
“A split decision by Brazilian policy makers to hold rates steady and a nod to potential adjustments at coming meetings represented a hawkish twist at the central bank’s September gathering. In our view, the accompanying statement was aimed more at discouraging investors from pricing in rate cuts anytime soon than suggesting new hikes ahead.” – Adriana Dupita, Bloomberg Brazil economist
“There was a huge inflationary shock, but it’s easing now,” Alexandre de Azara, chief economist at UBS BB, said ahead of the decision.
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.
21 September 2022
Banco Central Do Brasil Comitê de Política Monetária (Copom)
Monetary Policy Statement September 21, 2022
Copom left the Selic rate to 13.75% p.a.
In its 249th 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 adverse and volatile, with continued downward revisions on prospective growth in the major economies, especially in China. The inflationary environment remains under pressure, while the process of normalization of monetary policy in advanced economies continues towards contractionary rates.
- Turning to the Brazilian economy, second quarter GDP came stronger than expected, and the set of indicators released since the previous Copom meeting suggests that the economy kept growing.
- Despite the recent reduction in prices of more volatile items and the impacts of tax measures, consumer inflation remains high.
- 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 6.0%, 5.0% and 3.5%, respectively; and
- In the reference scenario, the interest rate path is extracted from the Focus survey, and the exchange rate starts at USD/BRL 5.20* 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 2022, and “yellow” in December 2023 and 2024. In this scenario, Copom’s inflation projections stand at 5.8% for 2022, 4.6% for 2023 and 2.8% for 2024. Inflation projections for administered prices are -4.0% for 2022, 9.3% for 2023 and 3.7% for 2024. The Committee decided again to emphasize the six-quarter-ahead horizon, which reflects the relevant horizon, mitigates the primary effects from the tax changes but incorporates their second-round effects. On this horizon, which refers to the first quarter of 2024, the 12-month inflation projection stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.stands at 3.5%. The Committee judges that the uncertainty in its assumptions and projections is higher than usual.
Will Brazil after being among the first to start tightening worldwide in March 2021 also become among the first to finish.
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) 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; and (iii) an output gap tighter than the currently adopted by the Committee in its reference scenario, especially in the labor market. Among the downside risks, it should be noted (i) an additional reduction in the prices of international commodities measured in local currency; (ii) a greater than projected deceleration of global economic activity; and (iii) the continuity of tax cuts assumed to be reversed in 2023. The Committee assesses that the still uncertain and volatile current scenario requires serenity when evaluating risks.
Considering the assessed scenarios, the balance of risks, and the broad array of available information, the Copom decided to maintain the Selic rate at 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 economic fluctuations and fostering full employment.
The Committee will remain vigilant, assessing if the strategy of maintaining the Selic rate for a sufficiently long period will be enough 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 reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.
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, Maurício Costa de Moura, Otávio Ribeiro Damaso and Paulo Sérgio Neves de Souza. The following members voted for a residual adjustment of 0.25 p.p: Fernanda Magalhães Rumenos Guardado 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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