Brazil Central Bank minutes raise the possibility of interest rates to hike at the next meeting

The chances of a more aggressive hike to keep inflation in check are raising; with inflationary pressures "more intense than expected", a faster pace of policy tightening may be required

Brazil's Central Bank rates 2021
The Central Bank headquarters building is seen in Brasilia. Photo: REUTERS/Ueslei Marcelino
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Brazil‘s Central Bank discussed raising interest rates last week by more than 75 basis points, minutes from its last policy meeting showed on Tuesday, raising the chances of a more aggressive hike at its next meeting to keep inflation in check.

The minutes of the June 15-16 meeting, where the bank’s rate-setting committee known as Copom raised rates to 4.25%, showed policymakers believe a full normalization of policy is now appropriate, shifting up a gear from a more cautious “partial” approach in recent meetings.

With inflationary pressures “more intense than expected”, a faster pace of policy tightening at the next meeting may be required, the minutes said. This would lift the Selic closer to the “neutral” level of interest when the economy runs at full employment and potential growth without fueling inflation.

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“In our view, the minutes go a step further (in relation to the statement) in giving Copom the flexibility to increase the rate of interest rate hikes, and/or go beyond neutral,” said Caio Megale, an economist at XP Investments.

The 75-basis point increase in the central bank’s benchmark Selic rate last week was the third consecutive hike of that magnitude, as Copom seeks to prevent current inflation from lifting 2022 expectations beyond the target.

The central bank’s 2022 inflation target is 3.50%. Copom last week said its baseline scenario currently points to 12-month inflation of 3.50% by the end of next year, but many economists reckon inflation next year will be closer to 4.00%.

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Annual inflation is currently running at more than 8%. Copom’s own estimates point to it ending this year 5.8%, well above its goal of 3.75% and even the 5.25% upper limit of its target range.

“The Committee evaluated a quicker reduction of monetary stimulus already on this meeting,” the minutes read.

“The Committee decided that the best strategy would be to maintain the current pace of stimulus reduction but highlighting the possibility of a quicker adjustment in the next meeting.”

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Economists reckon the neutral rate of interest would be a Selic of around 6.00%-6.50%. If inflationary pressures do not cool, Copom may be forced to go beyond 6.50%.

The minutes show Copom maintained “transparency” in its communications that more flexibility to adjust policy at a potentially faster rate was required, and that a return to the neutral rate “has become appropriate”.

Despite the recent exchange rate appreciation that has seen the dollar fall to around 5.00 reais, short-term inflation pressures remain strong, the minutes said.

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