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Banco Central do Brasil​ hiked its benchmark interest rate by 100bp to 6.25% widening the Brazilian Real spread to the US Dollar. The Brazilian central bank said the underlying inflation is above the range compatible with meeting the inflation target. Earlier in the day the US Federal Reserve left rates unchanged..

Brazil Real

Highlights:

  • Copom increases the Selic rate to 6.25% p.a.
  • Brazilian indicators continue to show a positive evolution and do not ensue relevant revisions in growth forecasts, which display a robust economic recovery during the second half of the year;
  • Consumer inflation remains high. Industrial goods price increases due to higher input costs, supply restrictions, and redirecting of services demands towards goods has not subsided and should remain a pressure in the short run.
  • Services inflation has accelerated in recent months, reflecting the gradual normalization of the sector, as expected.
  • Pressures persist in volatile components such as food and fuel prices and especially electricity fares, due to factors including the exchange rate, commodity prices, and adverse weather conditions;
  • Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are around 8.3%, 4.1%, and 3.25%, respectively;
  • The Committee emphasizes that risks to its baseline scenario remain in both directions.

 

Statement September 2021 Published at 18:39 Updated 22/09 at 18:39 ​

In its 241th meeting, the Copom unanimously decided to increase the Selic rate to 6.25% p.a.

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

Regarding the global outlook, there are two additional risk factors to the growth of emerging economies. First, reductions in forecasts for growth in Asian economies, reflecting the evolution of the Covid-19 Delta variant. Second, a tightening of monetary conditions in various emerging economies, as a reaction to recent inflation surprises. However, the long-lasting monetary stimuli and the reopening of major economies still sustain a favorable environment for emerging markets. The Committee continues to consider that a new round of market discussion regarding inflationary risks in advanced economies could result in a challenging environment for emerging economies;

· Turning to the Brazilian economy, the second quarter GDP release as well as the most recent indicators continue to show a positive evolution and do not ensue relevant revisions in growth forecasts, which display a robust economic recovery during the second half of the year;

· Consumer inflation remains high. Industrial goods price increases – due to higher input costs, supply restrictions, and redirecting of services demands towards goods – has not subsided and should remain a pressure in the short run. In addition, services inflation has accelerated in recent months, reflecting the gradual normalization of the sector, as expected. Finally, pressures persist in volatile components such as food and fuel prices and especially electricity fares, due to factors including the exchange rate, commodity prices, and adverse weather conditions;

· 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 8.3%, 4.1%, and 3.25%, respectively; and

· The Copom's inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.25* and evolving according to the purchase power parity (PPP), stand around 8.5% for 2021, 3.7% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 8.25% in 2021 and to 8.50% during 2022 and drops to 6.75% during 2023. In this scenario, inflation projections for administered prices are 13.7% for 2021, 4.2% for 2022 and 4.8% for 2023. The energy flag is assumed to be "hydric scarcity" in December 2021 and "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 recent 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 recent improvement of debt sustainability indicators, the elevated fiscal risk creates an upward asymmetry in the balance of risks, i.e., in the direction of higher-than-expected paths for inflation over the relevant horizon for monetary policy.

The Committee reiterates that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential for a sustainable economic recovery. The Copom also stresses that uncertainty regarding the continuation of the reform agenda and permanent changes to the fiscal consolidation process could result in an increase in the structural interest rate.

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 1.00 p.p. to 6.25% p.a. The Committee judges that this decision reflects its baseline scenario for prospective inflation, a higher-than-usual variance in the balance of risks, and is consistent with the convergence of inflation to its target over the relevant horizon for monetary policy, which includes 2022 and, to a lesser extent, 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, at the present stage of the tightening cycle, this pace is the most appropriate to guarantee inflation convergence to the target at the relevant horizon and, simultaneously, allow the Committee to obtain more information regarding the state of the economy and the persistence of shocks. At this moment, the Copom's baseline scenario and balance of risks indicate as appropriate to advance the process of monetary tightening further into the restrictive territory.

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 achievement of the inflation target 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.

What is interesting with  this uncertainty about the economic and political future of Brazil is not putting pressure on the Brazilian stock market as you would suspect. This suggests the positive market sentiment through commodities such as oil and risk on coupled with credible monetary policy are supporting BRL.

Clearly infation is the primary concern for the Banque de Brasil and that would need altered conditions to change that as they indicated.

Source: Banco Central Do Brasil

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