Brazil raises rate 7th time, to ‘persevere’ with tightening

December 9, 2021

Brazil’s central bank raised it benchmark interest rate for the seventh time and said it expects to raise the rate by the same magnitude at its next policy meeting, saying emphatically it “will persevere in its strategy until it consolidates not only the disinflation process but also the anchoring of expectations around its goals.”
The Central Bank of Brazil (BCB) raised its Selic rate by 150 basis points to 9.25 percent and has now raised it by 7.25 percentage points this year following rate hikes in March, May, June, August, October and today.
Brazil becomes the fourth central bank to raise its rates in December, following in the heels of Moldova, Georgia and Poland, with number of rate hikes by 38 central banks so far this year rising to 106 as compared with only 15 rate cuts, a ratio of 7:1.
Apart from Zimbabwe, Brazil has been the most aggressive central bank worldwide in its monetary tightening, with Angola taking the second place by raising its rate 4.50 percentage points.
Zimbabwe has raised its main interest rate by 25 percentage points to 60 percent, and said earlier this week the rate hikes had helped stabilize the exchange rate and consumer prices.

BCB’s monetary policy committee Copom is next scheduled to meet on Feb. 2, 2022.

Today’s rate hike follows a continuous rise in Brazil’s inflation rate this year to 10.67 percent in October from 4.56 percent in January and 10.25 percent in September, well in excess of the central bank’s target this year of 3.75 percent, plus/minus 1.5 percentage points.

Copom said the rise in inflation has been higher than it expected, both in the more volatile components and in those prices linked with underlying inflation and above the range that is compatible with reaching its inflation target.

“The Copom considers that, given the increase in its projection and the risk of unanchoring expectations for longer term, it is appropriate for the monetary tightening cycle to advance significantly in contractionary territory,” a unanimous Copom said.

Copom also said a further loosening of fiscal policy in response to the pandemic would worsen the fiscal trajectory, raising the risk premium for Brazilian assets and loosening inflation expectations.

“This implies a higher probability of inflation trajectories higher than projected under the baseline scenario,” Copom said.

Copom projects inflation of around 10.2 percent for 2021, 4.7 percent for 2022 and 3.2 percent for 2023, with the assumption that interest rates rise to 9.25 percent this year.

In 2022 interest rates are assumed to continue to rise and peak at 11.75 percent before easing to 11.25 percent by the end of the year and then decline to 8.0 percent in 2023.

The Central Bank of Brazil issued the following statement:

“At its 243rd meeting, the Monetary Policy Committee (Copom) unanimously decided to raise the Selic rate to 9.25% pa

The update of Copom’s basic scenario can be described with the following observations:

In the external scenario, the environment became less favorable. Some central banks of major economies have clearly expressed the need to be cautious in the face of higher persistence of inflation, making financial conditions more challenging for emerging economies. In addition, the possibility of a new wave of Covid-19 during winter and the emergence of the Ômicron variant add uncertainty about the pace of recovery in the central economies;
Regarding Brazilian economic activity, indicators released since the last meeting once again show a moderately lower-than-expected evolution;
Consumer inflation remains high. The rise in prices was higher than expected, both in the more volatile components and in items associated with underlying inflation;
The various measures of underlying inflation are above the range compatible with the achievement of the inflation target;
Inflation expectations for 2021, 2022 and 2023 calculated by the Focus survey are around 10.2%, 5.0% and 3.5%, respectively; and
In the basic scenario, with a trajectory for the interest rate extracted from the Focus survey and an exchange rate starting from USD/BRL 5.65*, and evolving according to the purchasing power parity (PPP), Copom’s inflation projections are around 10.2% for 2021, 4.7% for 2022 and 3.2% for 2023. This scenario assumes a trajectory of interest rates that rises to 9.25% per year this year and to 11.75% per year during 2022, ending the year at 11.25%, and reduces to 8.00% pa in 2023. In this scenario, projections for regulated price inflation are 16.7% for 2021, 3.8% for 2022 and 5.2% for 2023. The “water scarcity” tariff flag is adopted in December 2021 and the hypothesis of a “red level 2” tariff flag in December 2022 and December 2023.

The Committee emphasizes that, in its basic scenario for inflation, risk factors remain in both directions.

On the one hand, a possible reversal, albeit partial, of the increase in international commodity prices in local currency would produce an inflation trajectory below the baseline scenario.

On the other hand, further extensions of fiscal policies to respond to the pandemic that put pressure on aggregate demand and worsen the fiscal trajectory could raise the country’s risk premiums.

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Despite the more positive performance of public accounts, the Committee assesses that questions regarding the fiscal framework increase the risk of uncoupling inflation expectations, maintaining the upward asymmetry in the balance of risks. This implies a higher probability of inflation trajectories higher than projected under the baseline scenario.

Considering the basic scenario, the balance of risks and the wide range of available information, the Copom unanimously decided to raise the basic interest rate by 1.50 percentage points, to 9.25% pa. The Committee understands that this decision reflects its baseline scenario and a balance of risks of variance greater than usual for prospective inflation and is compatible with the convergence of inflation to the targets over the relevant horizon, which includes calendar years 2022 and 2023. Without prejudice to its fundamental objective of ensuring price stability, this decision also implies smoothing out fluctuations in the level of economic activity and promoting full employment.

The Copom considers that, given the increase in its projections and the risk of unanchoring expectations for longer terms, it is appropriate for the monetary tightening cycle to advance significantly in contractionary territory. The Committee will persevere in its strategy until it consolidates not only the disinflation process but also the anchoring of expectations around its goals.

For the next meeting, the Committee foresees another adjustment of the same magnitude. The Copom emphasizes that the future steps of monetary policy can be adjusted to ensure the convergence of inflation to its targets, and will depend on the evolution of economic activity, the balance of risks and inflation projections and expectations for the relevant monetary policy horizon.

The following Committee members voted for this decision: Roberto Oliveira Campos Neto (chairman), 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.

*Value obtained through the usual procedure of rounding the average quotation of the USD/BRL exchange rate observed in the five business days ending on the last day of the week prior to the Copom meeting.”

www.CentralBankNews.info

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Brazil raises rate 7th time, to ‘persevere’ with tightening