Brazil benchmark interest raised to 13.25% a year
Amid the impact of the war in Ukraine on the global economy, Brazil’s Central Bank (BC) continued to tighten monetary policy belts. Its Monetary Policy Committee (COPOM) unanimously decided to raise the country’s benchmark interest rate, the Selic, from 12.75 to 13.25 percent per year. The decision had been expected by financial analysts.
Even though the 0.5 point increase stood within the predicted range, COPOM surprised the market by announcing it intends to keep raising the rate in the coming meetings. Until now, most analysts were expecting the index to remain at 13.25 percent a year until the end of 2022.
“For the next meeting, the [Monetary Policy] Committee anticipates a new adjustment, with equal or less magnitude. The committee notes that the growing uncertainty of the current landscape, coupled with the advanced stage of the adjustment cycle and its impacts yet to be gauged, requires additional caution,” the statement issued by COPOM reads.
The rate is at its highest since January 2017’s 13.75 percent a year. This was the 11th consecutive increase in the Selic rate. Despite the increment, the Central Bank slowed down the pace of monetary tightening. After two adjustments of one percentage point in a row, the value was raised by 0.5 percentage points.
From March to June last year, COPOM had raised the Selic rate by 0.75 percentage points at each meeting. In early August, the Central Bank started bringing it up by one percentage point at each sitting. Following the rise in inflation and the worsening of tensions facing the financial market, the Selic was raised by 1.5 percentage points from December last year to May this year.
With today’s decision (16), the Selic continues on the rise, a cycle that started after six years without its being raised. From July 2015 to October 2016, the index remained at a yearly 14.25 percent. After that, COPOM lowered the economy’s basic interest rate again until it reached 6.5 percent per annum in March 2018. The Selic was cut again in August 2019, reaching two percent a year in August 2020, driven by the economic contraction brought about by the COVID-19 pandemic. This was the lowest level in the time series initiated in 1986.
Inflation
The Selic rate is the main tool of Brazil’s Central Bank to curb the country’s official inflation—gauged by the National Broad Consumer Price Index, the IPCA. In May, the indicator was up 11.73 percent in 12 months—the highest for the month since 2015. Despite the fall in electricity prices following the end of the so-called tariff flags (different calculations depending on the flags tariffs are associated with, which are given different colors), inflation continues to be pressured by fuels.
The value is well above the ceiling of the target set for the inflation. For 2022, the National Monetary Council (CMN) fixed the inflation target at 3.5 percent, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, could neither exceed five percent this year nor fall below two percent.
In the inflation report released at the end of March by the Central Bank, the monetary authority estimated that the IPCA would close out 2022 at 7.1 percent in the basic scenario. The projection, however, was made outdated by the prolonged conflict between Russia and Ukraine, as it brings the price of oil up. A new version of the report should come out later this month.
Market forecasts are more pessimistic. According to the Focus readout, a weekly survey of financial institutions published by the Central Bank, the official inflation should close out the year at nine percent. The survey has been suspended because of a strike by Central Bank employees, but an update was released last week.
Pricier credit
Raising the Selic rate helps bring inflation under control, as higher interest makes credit more pricier and discourage production as well as consumption. Conversely, more elevated rates hinder economic recovery. In the last inflation report, the Central Bank projected a one percent growth for the economy in 2022.
The market is predicting a slightly higher growth. According to the latest Focus readout, economic analysts forecast a 1.5 percent expansion in the gross domestic product this year.
The basic interest rate is used in negotiations of government bonds in the Special System for Settlement and Custody (Selic), and serves as a gauge for other interest rates in the economy. By pushing it upwards, the Central Bank curbs the excess demand that puts pressure on prices, since higher interest rates make credit more expensive and stimulate savings.
By slashing the benchmark interest, COPOM makes credit cheaper and encourages production and consumption, but slackens the control over inflation. Before pulling the Selic rate down, the monetary authority needs to be sure that prices are under control and not at risk of rising.
