RIO DE JANEIRO, BRAZIL – On Wednesday, June 15, Brazil’s Central Bank raised the basic interest rate by 0.5 percentage points to 13.25% per annum, its highest level in six years, in an attempt to curb inflation, which stands at 11.73%, more than double the target set by the Issuer for this year.
Even though the rate hike this time was lower than what had been approved in recent meetings, the current basic interest rate is the highest in the country in six years since Brazil recorded 13.75% per annum in December 2016.
In the eleventh consecutive rate hike, the Central Bank’s Economic Policy Committee (Copom) once again slowed down the gradual rise in the cost of money, which had been increasing by one percentage point since February, after pushing for 1.5 percentage point increases since October 2021.
“The external environment continued to deteriorate, marked by negative revisions to prospective global growth in an environment of strong and persistent inflationary pressures,” Copom said in a statement justifying its decision.
“The tightening of financial conditions, motivated by the repricing of monetary policy in advanced countries, as well as by the increase in risk aversion, raises uncertainty and generates additional volatility, particularly in emerging countries,” the agency added.
The increase in the cost of money seeks to curb the rise in prices, which, despite falling from 12.13% year-on-year in April to 11.73% in May, continues at one of its highest levels in the last 18 years and is well above the target set by the Issuer.
For this year, the Central Bank set an inflation target of 3.50% with a tolerance margin of 1.5 percentage points up or down, bringing the ceiling to 5%.
Inflation estimates are not very encouraging for 2022 due to the current global situation caused by the war between Russia and Ukraine.
Economists forecast that Brazil will end the year with an inflation rate of 8.5%, which, although lower than that of 2021 (10.06%), will almost double the target set by the Central Bank for the second consecutive year.
According to projections released in May, the Government has been a little more optimistic and expects the country to close 2022 with an inflation rate of 7.9%.
The rise in prices in Brazil and the increase in the cost of money will consequently result in a lower economic growth rate for the country in 2022, estimated to be between 1.2% and 1.5% at the end of the year.
In 2021, the economy of the South American power grew by 4.6%, its highest rise in the last decade, which compensated for the historic fall that the GDP suffered in 2020 due to the effects of covid-19.
According to the statement released by Copom, based on market expectations for inflation, rates in Brazil will again have an August adjustment “of equal or lesser magnitude.”
“This scenario assumes a trajectory ending 2022 at 13.25% per annum and falling to 10.0% in 2023 and 7.50% in 2024,” the document states.
With information from EFE