Hikes in Brazil interest likely to slow down: Central Bank
The increases to Brazil’s benchmark interest rate Selic are likely to see a slowdown. The forecast can be seen in the minutes to the last meeting of the country’s Monetary Policy Council (COPOM), made public today (Feb. 8) by the Central Bank. Estimates, however, may be reviewed in a bid to pull the inflation closer towards the target.
Last week, the committee raised the Selic rate from 9.25 to 10.75 percent a year, mentioning higher inflation in foods, fuels, and energy. It was the first time since July 2017—when the rate reached 10.25 a year—that the Selic reached a two-digit threshold.
“Regarding its next steps, the Committee believes a reduction in the pace of adjustments to the benchmark interest rate is the most appropriate course of action at this moment. This reflects the state of the tightening cycle, whose cumulative effects will be clear over the course of the relevant horizon,” the minutes read.
“Future steps regarding monetary policy,” the committee goes on to declare, “may be adjusted in order to ensure the convergence of the inflation towards its targets, and should hinge on the evolution of economic activity, the balance of risks, and the forecasts and expectations on the inflation for the relevant horizon in the monetary policy.”
The Selic is the main tool used by Brazil’s Central Bank to curb the country’s official inflation, gauged by the National Broad Consumer Price Index (IPCA). The indicator closed out 2021 at 10.06 percent, the highest since 2015, pulled by the dollar, fuels, and the hike in electric energy.
Forecasts
In the scenario described by the COPOM—with a trajectory for the interest rate based on the Focus market readout and a dollar at BRL 5.45—predictions for the inflation stood at an approximate 5.4 percent for 2022 and 3.2 percent for 2023. The landscape implies interest rising to 12 percent a year in the first half of 2022, 11.75 percent at the end, and plunging down to eight percent a year in 2023.
The inflation should therefore close out 2022 above the 3.5 percent target. The tolerance is 1.5 percentage points. In other words, inflation may stand between two and five percent.
For 2023, the center of the target is 3.25 percent, also with a tolerance of 1.5 percentage points.
Risk factors
The inflation involves a number of risks in both directions. On the one hand, “a possible reversal, possibly partial” in the hike facing commodity prices in local currency could lead to inflation below the reference scenario. On the other hand, the text goes on, “fiscal policies bringing an extra boost to added demand or undermining the future fiscal trajectory may have a negative impact on the prices of important assets and raise the country’s risk premium.”
