RIO DE JANEIRO, BRAZIL – Brazil’s Central Bank kept its key interest rate SELIC at a record-low 2.00% on Wednesday, as expected, but gave the first sign that it could soon remove its “forward guidance” pledge to keep rates lower for longer, in light of the recent rise in inflation.
In a statement accompanying the unanimous decision, the bank’s rate-setting committee known as ‘Copom’ said conditions for forward guidance still hold, and that the economy still requires a large amount of monetary stimulus.
But Copom’s inflation forecasts were notably higher than its last meeting in late October and in one scenario well above-target for 2022, the year Copom said is gaining more weight in its policy decisions.
For the first time, policymakers outlined a scenario where that guidance could be withdrawn.
“A scenario of inflation expectations converging to target suggests that the conditions for maintaining the forward guidance may soon no longer apply,” Copom said in its statement.
This would not “mechanically imply” that interest rates will rise, and in the event, policy would still be guided by the bank’s inflation-targeting framework.
Copom said the recent spike in inflation is temporary, and that it will continue to monitor developments closely, “in particular the core inflation readings.”
Figures this week showed that annual consumer inflation in November topped 4% for the first time since February. That is the mid-point of the central bank’s target range for this year, and more than double the rate it was only six months earlier.
Using market-based forecasts for interest rates, and an FX rate of 5.25 reais per dollar evolving according to purchasing power parity, Copom sees inflation around 4.3% this year and 3.4% next year, and 3.4% in 2022.
Using a constant interest rate of 2.00% and the same FX outlook, Copom sees inflation reaching 4.3% this year, 3.5% next year and 4.0% in 2022, the final year of its policy horizon.
It was the third policy meeting in a row that Copom has left the SELIC rate at 2.00%, after cutting it to that all-time low in August. The decision to hold the rate was expected by all 28 economists surveyed in a Reuters poll.
Source: Reuters