03 Feb

Brazil raises rate 8th time, to slow pace of tightening

February 3, 2022

By CentralBankNews.info

Brazil’s central bank raised its main interest rate for the 8th time and while it said it will persist in tightening monetary policy until inflation decelerates and inflation expectations anchor around its target, it also said it would reduce the size of rate increases in future policy decisions.
The Central Bank of Brazil (CBC) raised its Selic interest rate by another 1.50 percentage points to 10.75 percent and has now raised it 8.75 percentage points since it began raising the rate in March last year and followed this up with rate hikes in May, June, August, September, October, December and today.
      After raising its rate by by 75 basis points each in its first three rate hikes, CBC accelerated the pace of tightening by raising the rate by 100 points in August and September last year before it then raised the rate by 150 points in October, December and then today.
      The central bank’s policy-making committee, Copom was again unanimous in its decision.
     “The Committee considers that, given the increase in its inflation projections and in the risk of a de-anchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory,” CBC said.
     However, Copom also said the cumulative impact of past rate hikes was expected to begin to manifest themselves and ” for its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate.”
      Brazil’s inflation rate decelerated to 10.06 percent in December from a 18-year high of 10.74 percent in November and CBC said various measures of underlying inflation remain above the range that is compatible with meeting the inflation target of 3.75 percent, plus/minus 1.5 percentage points.
      Based on interest rate expectations in the bank’s Focus survey, Copom expects inflation of 5.4 percent for 2022 and 3.2 percent for 2023, under the assumption the Selic rate rises to 12 percent in the first half of 2022 before ending the year at 11.75 percent.
     In 2023 Selic is expected to decline to 8.0 percent.
     The Central Bank of Brazil issued the following statement:
  • “​I n 24 4 th meeting, the Cop om continuously decided to increase the Selic rate by 10.75 % pa

The following observations provide an update of the Copom’s reference scenario:

  • Regarding the global outlook, the environment remains less favorable. More persistent inflation increases the chances of faster monetary tightening in the US, turning financial conditions more challenging for emerging economies. In addition, the recent Covid-19 wave adds uncertainty about the pace of activity, and at the same time could delay the normalization of the global supply chains;
  • Turning to the Brazilian economy, growth indicators of the Q4 posted a slightly better than expected evolution, especially in labor market data;
  • Consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and particularly on the items associated with core inflation;
  • The various measures of underlying inflation are above the range compatible with meeting the inflation target;
  • Inflation expectations for 2022 and 2023 collected by the Focus survey are around 5.4%, and 3.5%, respectively; and
  • The Copom’s inflation projections in its reference scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.45* and evolving according to the purchase power parity (PPP), stand around 5.4% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 12% in the first half of 2022, ends the year at 11.75%, and drops to 8.00% during 2023. In this scenario, inflation projections for administered prices are 6.6% for 2022 and 5.4% for 2023. The energy flag is assumed to be “red level 1” in December of 2022 and 2023.

The Committee emphasizes that risks to its reference scenario remain in both directions.

On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in the reference scenario.

On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country’s risk premium.

In spite of the more favorable public accounts data, the Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations and, therefore, the upward asymmetry in the balance of risks. This implies a higher probability of inflation paths above the one projected under the reference scenario.

Free Reports:

Get our Weekly Commitment of Traders Reports - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.





Sign Up for Our Stock Market Newsletter – Get updated on News, Charts & Rankings of Public Companies when you join our Stocks Newsletter




Taking into account the balance of risks, and the broad array of available information, the Copom Committee referenced scenario decided to increase the Selic rate by 1.50 pp to 10.75% pa The judges that this decision reflects its reference for prospective inflation, a higher-than-usual variance in the balance of policy risks and is consistent with the convergence of inflation to its target throughout the relevant horizon for monetary policy, which includes 2022 and to a larger degree, 2023. Without compromising its fundamental objective of ensuring inflation price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

The Committee considers that, given the increase in its inflation projections and in the risk of a deanchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate.

For its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate. This indication reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets 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, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sergio Neves de Souza.”

www.CentralBankNews.info


investmacro cot newsletter




Economics & Fundamentals Financial News