Brazil’s Central Bank interest rate hikes likely to slow down

RIO DE JANEIRO, BRAZIL – Hikes to Brazil’s benchmark interest rate are likely to see a slowdown, based on the last Monetary Policy Council (COPOM) meeting’s minutes, released yesterday, February 8. However, projections may be reviewed in an attempt to pull inflation closer towards the target.

Last week, the COPOM raised the SELIC rate from 9.25% to 10.75% a year, noting higher inflation in foods, fuels, and energy. It was the first time that the SELIC reached two-digits since July 2017 — when the rate hit 10.25% a year.

“Regarding its next steps, the Committee believes a reduction in the pace of adjustments to the benchmark interest rate is the most appropriate course of action at this time. This reflects the state of the tightening cycle, whose cumulative effects will be clear over the course of the relevant horizon,” the minutes read.

“Future steps regarding monetary policy may be adjusted in order to ensure the convergence of inflation towards its targets, and should hinge on the evolution of economic activity, the balance of risks, and the forecasts and expectations on the inflation for the relevant horizon in the monetary policy.”

The SELIC is the Central Bank’s main tool to curb official inflation, based on the Extended National Consumer Price Index (IPCA), which closed 2021 at 10.06%, the highest since 2015, pulled by the dollar, fuels, and the hike in electric energy.

PROJECTIONS

In the scenario described by the COPOM — with the interest rate trajectory based on the Focus market report and the dollar at R$5.45 — inflation projections stood at 5.4% for 2022 and 3.2% for 2023. The scenario implies the SELIC rising to 12% a year in the first half of 2022, 11.75% by the end of the year to then lower to 8% a year in 2023.

Inflation is expected to close 2022 above the 3.5% target, with a 1.5 percentage points tolerance. In other words, inflation may stand between 2% and 5%.

For 2023, the center of the target is 3.25%, also with a 1.5 percentage points tolerance.

RISK FACTORS

Inflation hinges on numerous risks. On the one hand, “a potential reversal, possibly partial” in the hike of commodity prices in local currency could lead to inflation below the reference scenario. On the other hand, “fiscal policies providing an extra boost to added demand or undermining the future fiscal trajectory may have a negative impact on the prices of key assets and raise the country’s risk premium,” the text reads.