Economy

Brazil's cenbank raises the basic interest rate to 3.5% and signals a third increase of 0.75% for June

The so-called Selic rate rose from 2.75% to 3.5% per year, an all-time high since May last year

Photo: REUTERS/Adriano Machado
Ler em português
  • The movement occurs amid the persistent increase in current inflation and expectations for inflation in 2022;
  • The country has suffered an increase of inflation, under the pressure of high commodity prices and, until recently, fuel prices.

Brazil‘s Central Bank announced on Wednesday the second consecutive increase of 0.75% of the basic interest rate, to 3.5%, and indicated the intention to make another squeeze of the same magnitude in its next meeting, in June.

The movement occurs amid the persistent increase in current inflation and expectations for inflation in 2022.

READ ALSO: Brazil tax reform hits another obstacle as joint-chamber commission scrapped

“At this moment, the basic scenario of the Monetary Policy Committee indicates that a partial normalization of the interest rate is appropriate, with the maintenance of some monetary stimulus throughout the process of economic recovery,” stated Central Bank’s Monetary Policy Committee in a statement in which it was more concerned with inflation than economic activity.

“For the next meeting, the Committee foresees the continuation of the process of partial normalization of the monetary stimulus with another adjustment of the same magnitude”, added the collegiate, stressing that future steps may be adjusted to ensure the fulfillment of the inflation target.

The 0.75% increase was widely expected by the market, after the Monetary Policy Committee explained its intention to repeat in May the tightening dose promoted at the previous meeting, in March, when the so-called Selic rate was raised for the first time in almost six years.

READ ALSO: Colombian finance minister quits after tax reform withdrawn

All 29 analysts interviewed in a Reuters poll conducted on April 28 and 29 predicted an increase of 0.75% for this meeting.

The inflation projection of the Brazil‘s cenbank’s basic scenario, which takes into account the Selic trajectory estimated by the market and an exchange rate that evolves while maintaining purchasing power parity, points to an IPCA (inflation index) of 5.1% in 2021 (5% at the March meeting) and 3.4% in 2022 (3.5% before). The Central Bank points out, however, that its balance of risks suggests that these levels of inflation could potentially be surpassed because of the country’s fiscal risk.

Regarding economic activity, the Brazilian Central Bank said that recent indicators show a more positive evolution than expected, even with the second wave of the Covid-19 pandemic having surprised negatively.

“Prospectively, the uncertainty about the growth rate of the economy remains above the usual level, but it should gradually return to normal,” said the Committee.

READ ALSO: Latin America and the Caribbean is the most indebted developing region due to the pandemic, says ECLAC

Brazil’s basic rate standardization

By raising interest rates in March, the Central Bank announced that it was initiating a process of “partial normalization” of monetary policy, indicating the intention to still maintain a stimulus to the economy, with interest rates below the level considered neutral (6.5%, second basic scenario cited by the Central Bank last month).

In this new communiqué, the monetary authority adjusted the language, emphasizing that “at the moment” the basic scenario indicates the partial normalization of the interest rate as appropriate, “with the maintenance of some monetary stimulus throughout the process of economic recovery”.

For André Muller, chief economist at AZ Quest, with this Wednesday’s statement, “the Central Bank’s commitment to the inflation target is explicit, and not to a partial normalization scenario”.

“I believe that we will maintain the recent movements in the markets, with a more appreciated exchange rate and decompression of long interest rates, given Copom’s stronger commitment to the inflation target,” said Muller.

READ ALSO: Colombian peso and shares depreciate after retreating tax reform proposal

The country has suffered an escalation of inflation, under the pressure of rising commodity prices and, until recently, fuel prices, even amid the intensification of the restriction measures due to the upsurge in the Covid-19 pandemic. As highlighted by the Central Bank in its statement, the higher levels of the energy tariff flag also promise to keep inflation under pressure in the short term.

The inflation index surpassed 6% in the 12 months to March, above the threshold of this year’s target, which is 3.75%, with a margin of tolerance of 1.5 points more or less. Market expectation is that inflation will close the year at 5.04%, according to the most recent Focus survey by the Central Bank.

For 2022, the horizon on which monetary policy is now focused, market expectations point to inflation of 3.61%, above the central target for the period, which is 3.5%, also subject to the margin of tolerance.

The market expects the Selic to close this year at 5.50%, reaching 6.25% at the end of 2022, according to the most recent Focus.

The Committee will meet again on June 15th and 16th.

(Translated by LABS)

Get the best insights about Latin America market in your inbox