Interest Rates in Brazil Expected to Increase Again to 13.75%

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – Brazil’s benchmark interest rate (Selic) is expected to increase again this week, as Central Bank officials sit down for their scheduled Copom (Monetary Policy Committee) meeting Tuesday and Wednesday, June 2nd and 3rd. According to surveys conducted by the Central Bank, financial analysts forecast an increase by five percentage points on the Selic, with the rate going to 13.75 percent per year.

According to analysts, the increase will be yet another attempt to contain the IPCA (inflation index) for 2015, which is currently well above the target ceiling of 4.5 percent. Annual inflation forecasts for 2015 last week reached 8.39 percent, increasing for the seventh consecutive week in the Focus Survey conducted by the Central Bank. The survey assesses the forecasts of 100 financial institutions. Central Bank officials have also admitted that inflation this year is likely to close well above the target center, forecasting an IPCA of 7.9 percent.

Analysts say that although the increase in the Selic may help control prices, it will hinder economic activity, leading to a decline in production and consumption. The financial market is already forecasting a contraction in the country’s GDP for 2015 of 1.27 percent.

In its April report, the IMF (International Monetary Fund) had estimated a one percent contraction in Brazil’s GDP due to ‘a rigid fiscal and monetary policy and cuts in investments in Petrobras’, stating that the country was likely to see an inflation of 7.8 percent and a foreign exchange rate at the end of the year of R$3.14/US$.

The international entity, however, believes that the ‘successful implementation of the fiscal adjustment and other measures should contribute to strengthen confidence and boost investments at the end of 2015’ leading the way to a GDP growth of one percent in 2016.