17 Jun

Brazil raises rate 3rd time, sees same hike in August

June 17, 2021

By CentralBankNews.info

Brazil’s central bank raised its key interest rate for the third time this year – as expected – and said it expects to continue normalizing its monetary policy stance with another rate hike of the same magnitude at its next policy meeting in August to ensure inflation slows to its target by 2022.
The Central Bank of Brazil (BCB) raised its benchmark Selic rate by another 75 basis points to 4.25 percent and has now raised it by 2.25 percentage points since it began tightening its policy stance in March this year with a 75-point hike and followed this with a similar-sized hike in May.
      Although the bank’s policy committee, Copom, said it expects to raise the Selic rate by another 75-points on Aug. 4, it warned that a deterioration in inflation expectations “may require a quicker reduction of the monetary stimulus,” adding it’s view would depend on economic activity, the balance of risks and how these affect inflation projections.
      Inflation in Brazil has been rising steadily since May last year and rose to a higher-than-expected 8.06 percent in May, the highest since September 2016, with drought and higher commodity prices adding to the upward pressure from improving demand.
     The central bank targets inflation of 3.75 percent this year, plus/minus 1.5 percentage points, and a midpoint target of 3.50 percent in 2022, within the same range.
     Copom noted inflation expectations for 2021 in the weekly FOCUS survey now stand at 5.8 percent, then 3.8 percent for 2022 and 3.25 percent for 2023.
     Copom’s own projections assume a Selic rate that ends this year at 6.25 percent and then 6.50 percent in 2022.
     Looking to Brazil’s economy, the bank said recent indicators continue to be better than expected despite the intensity of the second wave of the COVID-19 pandemic and the risks to the recovery have lessened.
     The Central Bank of Brazil issued the following statement:

“In its 239 th meeting, the Cup slightly decided to increase the Selic rate to 4.25% pa

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

· Regarding the global outlook, fiscal and monetary stimulus in some developed countries promotes robust economic recovery. Due to economic slack, central bank communication from major economies suggests monetary stimuli will last long. However, uncertainty remains high and a new round of market discussion regarding inflationary risks in these economies could result in a challenging environment for emerging economies;

· Turning to the Brazilian economy, despite the intensity of the second wave of the pandemic, recent indicators continue to evolve better than expected, implying relevant revisions in growth forecasts. Risks to economic recovery were significantly reduced;

· The persistence of inflationary pressure was more intense than expected, especially in industrial goods. Additionally, the slow pace of supply normalization, the resilience of demand and implications of the energy scenario for the payment over electricity fares contribute to keeping inflation under pressure in the short run, in spite of the Real Appreciation. The Committee continues to closely monitor the evolution of shocks and their possible second-round effects, as well as the behavior of service prices and the immunization effects over the economy become more relevant;

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· The various measures of underlying inflation are above the range compatible with meeting the inflation target;

· Inflation expectations for 2021, 2022, and 2023 collected by the Focus survey are around 5.8%, 3.8%, and 3.25%, respectively; and

· The Copom’s inflation projections in its baseline scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.05* and evolving according to the purchase power parity (PPP), stand around 5.8% for 2021 and 3.5% for 2022. This scenario assumes the path for the Selic rate that ends 2021 at 6.25% pa and rises to 6.50% pa in 2022. In this scenario, inflation projections for administered prices are 9.7% for 2021 and 5.1% for 2022. The energy flag is assumed to be neutral, remaining at “red level 1” in December each year.

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

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

On the other hand, further extensions of fiscal policy responses to the pandemic that increase aggregate demand and deteriorate the fiscal path may pressure the country’s risk premium. In spite of the improvement of debt sustainability indicators, the elevated fiscal risk creates an upward asymmetry in the balance of risks, ie , in the direction of higher-than-expected paths for inflation over the relevant horizon for monetary policy.

The Committee reiterates that persevering in the process of reforms and necessary adjustments in the Brazilian economy is essential for a sustainable economic recovery. The Copom also stresses that uncertainty regarding the continuation of the reform agenda and permanent changes to the fiscal consolidation process could result in an increase in the structural interest rate.

Taking into account the baseline scenario, the balance of risks, and the broad array available information, the Glass of the baseline scenario has decided to increase the Selic rate by 0.75 pp to 4.25% The Committee judges that this decision scenario for prospective inflation, a higher-than-usual variance in the balance of risks, and it is consistent with the convergence of inflation to its target over the relevant horizon for monetary policy, which includes 2022. Without commitment its fundamental objective of ensuring price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

At this moment, the Copom’s baseline scenario indicates, as appropriate, the normalization of the policy rate to a level considered neutral. This adjustment is necessary to mitigate the dissemination of the temporary shocks to inflation. However, the Committee again emphasizes that there is no commitment to this plan, and that future steps of monetary policy could be adjusted to ensure the achievement of the inflation target.

For the next meeting, the Committee foresees the continuation of the monetary normalization process with another adjustment of the same magnitude. However, the deterioration of inflation expectations for the relevant horizon may require a quicker reduction of the monetary stimulus. The Copom emphasizes that its view will also depend on the evolution of economic activity, the balance of risks, and how these factors affect inflation projections.

The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fabio Kanczuk, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sérgio Neves de Souza.”

 www.CentralBankNews.info


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