Brazil’s central bank raises Selic rate to 6.25%, sees it rise to 7.25% in October – Update



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By Jeffrey T. Lewis and Paulo Trevisani

SÃO PAULO – Brazil’s central bank has raised its policy rate by one percentage point as consumer prices continue to rise rapidly, and said it plans to increase it by the same amount when it next meeting in October.

The central bank’s monetary policy committee on Wednesday raised the Selic, as it is known as the policy rate, to 6.25% from 5.25%, as expected. This was the second consecutive increase in this size, following increases of 75 basis points at each of the three previous meetings. The Selic started 2021 at a record high 2%.

Another percentage point increase in rates would be appropriate to ensure that the inflation rate falls back to the central bank’s target, she said in her statement. The central bank will monitor the economic situation and update its policy if necessary, he added.

The central bank’s monetary policy committee “stresses that its future policy measures may be adjusted to ensure the achievement of the inflation target and will depend on developments in economic activity, the balance of risks and expectations. and inflation projections for the relevant horizon for monetary policy, ”the statement said.

Brazil’s 12-month inflation rate hit a five-year high of 9.68% in August, higher than expected as a sharp depreciation of the currency and drought in many parts of the country pushed prices up on the rise. Shortly after the August inflation figures were released, several economists said they expected the bank to raise the Selic by more than one point at Wednesday’s meeting.

Central bank president Roberto Campos Neto last week toned down those expectations, saying the central bank would do whatever it takes to bring inflation down, but not necessarily change course due to individual indicators. Wednesday’s statement reinforced that message, according to Camila Abdelmalack, chief economist at Veedha Investimentos in São Paulo.

“The central bank has cooled expectations of higher increases,” said Ms Abdelmalack, who is forecasting another similar hike in each of the two remaining meetings this year to end the year with the Selic at 8.25%. “The statement was not that heavy, we don’t see a major change from the previous one even though inflation has worsened.”

The drought and the weakening of the real aren’t the bank’s only concerns about price pressure. The government has also increased spending to deal with the impact of economic restrictions imposed to fight Covid-19, which has killed nearly 600,000 Brazilians.

The central bank has indicated that the fiscal stimulus could push inflation beyond its target.

Economists say increased government spending is pushing up demand, putting pressure on prices.

Brazilian power companies had to turn on more expensive fuel-fired plants and passed the higher cost on to consumers, after reservoirs behind the country’s many hydropower plants fell to low levels. The drought has also affected crops and pushed up food prices.

Brazilian farmers and power companies are counting on more rain until the end of this year, and by mid-September rainfall increased in some areas, but it is still too early to tell if there is. will have enough improvement to help.

“There is a lot of uncertainty, more than anything else, about energy,” said Mauricio Nakahodo, senior economist at Banco MUFG Brasil. “It could impact the economy next year, and some see the possibility of electricity rationing if the rain does not return. It could impact economic growth next year.”

The Brazilian real could also increase the pressure on prices in the coming months. Brazilian President Jair Bolsonaro’s approval ratings are low, and the chances of his government securing approval for a long-awaited tax review appear slim. There are also fears that Congress may adopt spending measures that would increase the budget deficit and increase concerns about fiscal stability.

Both of these situations could undermine investor confidence in Brazil and weaken the real against the dollar. The Brazilian currency has lost about 15% of its value against the dollar since the start of the pandemic in February 2020, making imports more expensive.

This change, along with the rise in the price of oil on world markets, has caused fuel prices to skyrocket this year. The cost of gasoline has increased 31% since the start of 2021, and the price of diesel fuel has increased by 28% at the same time, according to the Brazilian statistics agency.

Write to Jeffrey T. Lewis at [email protected]


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