Central Bank raises benchmark interest rate to 10.75% a year
The recent rise in the dollar, coupled with uncertainties surrounding inflation, has led the Central Bank to raise interest for the first time in over two years. Its Monetary Policy Committee unanimously raised the Selic rate—Brazil’s benchmark interest rate—by 0.25 percentage points to 10.75 percent per year.
The last hike had taken place in August 2022, when the rate rose from 13.25 to 13.75 percent a year.
To justify the move, the committee named resilience in economic activity, pressures in the labor market, a positive output gap (where the economy is moving towards consuming more than its production capacity), higher inflation estimates, and a de-anchoring of inflation expectations. Regarding the future, the text was vague on the intensity and duration of the rising interest cycle.
“The pace of future interest rate adjustments and the total magnitude of the cycle now underway will be dictated by the firm commitment to converging inflation to the target and should depend on the evolution of inflation dynamics—especially the components most sensitive to economic activity and monetary policy—inflation projections, the output gap, and the balance of risks,” the committee stated.
Inflation
The Selic rate is the Central Bank’s main tool for curbing Brazil’s official inflation, as gauged by consumper price index IPCA. In August, the index stood at negative 0.02 percent. But the relief is seen as temporary.
The IPCA grew 4.24 percent in 12 months, close to the ceiling of this year’s target. For 2024, the National Monetary Council has set an inflation target of three percent, with a tolerance margin of 1.5 percentage points. The IPCA, therefore, cannot exceed 4.5 percent or sink below 1.5 percent this year.
In the latest inflation report, released at the end of June by the Central Bank, the forecast that the IPCA will end 2024 at four percent was maintained. However, the estimate could change due to the rise in the dollar and the impact of the prolonged drought on prices. The next report will be released at the end of September.
