Brazil’s Central Bank prepares to raise benchmark interest rate, targeting inflation

RIO DE JANEIRO, BRAZIL – This will be the 5th consecutive time this year that the monetary authority will raise the SELIC rate, now at 5.25% since the last meeting in August, when the bank raised interest rates by 1 percentage point after several lower hikes.

The decision, to be announced after the next Monetary Policy Committee (COPOM) meeting, was anticipated by the institution at the time, when it projected “another adjustment of the same magnitude” for its next meeting.

Some 100 consulting firms and financial institutions surveyed expect the COPOM to confirm its position and raise the benchmark rate to 6.25% per year.

Inflation in Brazil reached 5.67% between January and August, above the official target ceiling of 5.25%. In 12 months through August, price hikes accumulated 9.68%.

“If we look at the inflation figures and projections between the last COPOM meeting and this past week, we expected an intensification of monetary tightening, that is, a higher rate hike,” said MCM Consultores economist Mauro Schneider.

The latest Focus survey released by the Central Bank, which compiles market estimates, placed inflation at 8.35% for the end of the year.

However, Central Bank president Roberto Campos Neto contained expectations of a higher rate increase, assuring that the institution’s “flight plan” has a longer-term horizon. The Central Bank “does not need to react to high-frequency data,” such as the monthly inflation indicator, he explained.

Early this year, forecasts for the SELIC hovered around 3% through December; now, the average is 8.25%, according to the Focus survey.

GROWTH “AT RISK”

The Central Bank began raising its monetary policy benchmark rate in March after keeping it at historic lows in an attempt to boost credit and investment in a pandemic-depressed economy.

Infinity Asset’s chief economist Jason Vieira also notes the Central Bank’s moderation of market expectations, a “key” change in stance at a time when the tool is reportedly losing effectiveness, he said.

“The current inflation rates are not controllable by this tightening monetary policy,” he said. He cautioned that the Central Bank must address other variables such as the exchange rate, which raises the cost of inputs and imported goods and impacts prices.

Some, like Vieira, fear that the rate hike will slow down the economic recovery and affect growth, particularly next year due to its deferred impact. “The Central Bank now needs to show a little more prudence,” otherwise “it runs the risk of creating a macroeconomic effect to the point of economic contraction,” he said.