Brazil poised for biggest interest rate hike since 2003
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Brazil’s central bank is expected to promulgate its biggest interest rate hike in nearly two decades on Wednesday, with economists predicting a 100 basis point hike to limit the risk of soaring inflation.
Latin America’s most populous nation is experiencing sharp price acceleration as its economy recovers from the Covid-19 pandemic, pinching households and pressuring Banco Central do Brasil, or BCB, to take action .
A weak exchange rate, sustained global demand for raw materials, and rising electricity bills due to the worst drought in nearly a century all contributed to Brazil’s inflation, which topped 8% over the years. 12 months to June, more than double the official target of 3.75. percent for 2021.
A majority of economists polled by Reuters expect the BCB’s Selic rate to rise from 4.25% to 5.25%, which would be its fourth consecutive hike. The benchmark index was at an all-time low of 2 percent until March. The decision is expected Wednesday evening.
A jump of one full percentage point would represent an increase from the 75 basis point increases announced after the previous three meetings this year of the rate-setting committee, known as Copom. This would be the largest increase since its last 100bp increase in 2003.
As a commodity boom and pandemic-related bottlenecks in global supply chains fuel an international debate over whether a return in inflation will be temporary or lasting, central bankers of some countries are already tightening their monetary policy.
Russia, Mexico and Chile have all recently raised interest rates, as the US Federal Reserve draws closer to a decision to slow its massive monetary stimulus.
The BCB, which gained formal autonomy this year, is at the forefront of emerging markets pursuing an aggressive approach, said William Jackson, chief EM economist at Capital Economics.
However, he noted that Brazil’s gross domestic product was still below the 2014 level, before a deep recession hit.
“This would suggest that the economy is operating below its potential and that monetary policy should be stimulating,” Jackson said. “But with the inflationary threat as it is, there is a belief that cannot continue just yet.”
In a country that experienced soaring prices and hyperinflation only a generation ago, policymakers will need to strike a balance between protecting consumers and encouraging growth.
Cristiano Oliveira, chief economist at business lender Banco Fibra, suggested that Copom should accelerate rate hikes to bring estimates of future inflation closer to its target.
“In 2022, the center of the inflation target is 3.25%, but the inflation for the previous year is expected to be close to 7.5%. In other words, the central bank has a difficult job ahead of it, which is to reduce the inflation rate by more than 50 percent ”.
The cost of food has driven millions of people to hunger, with unemployment close to an all-time high in Brazil since data collection began in 2012. Transportation and accommodation have also become more expensive in recent times.
At the same time, low reservoir levels affected the production of hydroelectricity, the South American nation’s main energy source, forcing utilities to commission more expensive thermal power plants.