Brazil benchmark rate set to rise further

RIO DE JANEIRO, BRAZIL – Brazil’s Central Bank should raise the SELIC on Wednesday in an attempt to minimize risks of further capital outflows as the U.S. Federal Reserve prepares to start tightening its own policy.

An expected rise in the SELIC rate to 10.75% at the February 2 policy meeting would total 875 basis points of cumulative tightening since March 2021.

Inflation, soaring nearly everywhere in the world, has roughly doubled in Brazil from a little over 5% when the Central Bank began raising rates to around 10% now.

Rather than worry about the negative effect on a recessionary economy of such aggressive moves, Brazilian legislators fear inflation could accelerate further if lift-off by the Fed rekindles a streak of losses for the real currency.

The Fed’s recent switch to a hawkish stance has suddenly emerged as a top worry for Latin America’s biggest economy, as well as its fiscal slippage and the October presidential elections.

“Risks related to domestic public accounts, political uncertainty and the prospect of an increase in international interest rates are adding upward pressure on Brazilian interest rates,” said GO Associados chief economist Lucas Godoi.

While Brazil’s economy is in danger of sinking deeper into recession, Central Bank president Roberto Campos Neto says attacking inflation with a stricter policy stance is the best way to contribute to growth.

In a sign of further economic deterioration, the country unexpectedly posted negative foreign direct investment (FDI) of US$3.9 billion in December, the worst monthly figure ever recorded.

So far, Campos Neto’s monetary orthodoxy has yielded mixed results. Brazil’s IPCA-15 consumer price index decelerated this month from previous readings but still rose at a faster pace than expected.

This is likely to incite more aggressiveness from the Central Bank, as the consensus view for the SELIC’s maximum level this year was raised by 25 basis points to 12.00% from 11.75%.

“Above-expectations IPCA-15 reduces space for any pace slowdown,” Citi analysts wrote in a report. “Secondly, the recent increase of commodities prices amid an undervalued exchange rate suggests that inflation will remain high.”