RIO DE JANEIRO, BRAZIL – The Central Bank pondered raising interest rates beyond the 1-point adjustment it eventually adopted, but came to the conclusion that the rise was adequate to ensure the convergence of inflation to the target in 2022 while more cautiously assessing the state of the economy after the impact caused by the Covid-19 crisis.
“The Copom (Monetary Policy Committee) evaluated the costs and benefits of accelerating the pace of interest rate hikes,” according to the Copom minutes published on Tuesday, pointing out that three considerations were taken into account.
In the first place, the Central Bank evaluated that the stage of the adjustment cycle is characterized by a monetary policy that is already effectively contractionary.
Second, the monetary authority pointed out that simulations with interest rate hikes trajectories that maintain the current pace of adjustment but consider different terminal rates suggest that the current pace of SELIC increases is sufficient to reach a significantly contractionary level and ensure the convergence of inflation to the target in 2022, despite the asymmetry in the balance of risks.
“Finally, the weight of volatile items in the revisions of short-term inflation projections and the unprecedented process of post-pandemic economic readjustment reinforce the benefit of accumulating more information about the state of the economy and the persistence of current shocks,” the document highlighted.
Last week, the Central Bank increased the SELIC benchmark interest rate by one percentage point, to the level of 6.25% per year, and indicated that it would repeat the measure at the next Copom meeting, in October, seeking to advance in “contractionary territory” as it continues its aggressive monetary tightening cycle to tame inflation.
Source: Reuters