Interest rates will have to rise more than forecast in Focus survey – Brazil’s Central Bank president

RIO DE JANEIRO, BRAZIL – The Central Bank will need to tighten interest rate policy more than projected by the market in the Focus report to ensure that the inflation target is met in 2022, said on Thursday Central Bank President Roberto Campos Neto.

In a press conference, Campos Neto recalled that the Monetary Policy Committee’s (COPOM) balance of risks to inflation is asymmetric, that is, the risks of inflation being above projected next year are greater than the downward risks.

“When the balance is asymmetric, it means that you have to raise interest rates above what is projected in Focus,” said Campos Neto when asked if the Central Bank will need to raise interest rates above the level considered neutral to ensure compliance with the inflation target in 2022.

The Focus projections incorporated into the Central Bank’s base scenario point to a 6.25% SELIC at the end of this year and 6.50% at the end of 2022. Campos Neto stated that the neutral real interest rate currently stands at 3%.

Economic Policy Director Fabio Kanczuk complemented Campos Neto’s reasoning, pointing out that in the Central Bank’s scenario, the Focus interest rate leaves inflation for 2022 at 3.5%, the year’s target center.

“As there is asymmetry in the risk balance, this means that you have to aim for inflation a little lower, there is a little fat because of asymmetry, you have to practice a less stimulative monetary policy than the Focus interest rate,” he said.

The Central Bank president also denied that the COPOM refrained from promoting a higher interest rate hike in its meeting last week because it had not yet notified the market of its intention to do so. The SELIC was raised by 0.75 percentage points to 4.25%, but in the minutes the committee reported that the possibility of a greater tightening had been considered. The Central Bank also announced its intention to take interest rates to a level considered as neutral.

“I only wanted to emphasize that I read some comments that much of the decision was made for not having announced it. I would like to emphasize that this is not true, we could have announced it, we had many opportunities to do so,” Campos Neto said.

“But we waited because we thought that this debate about the factors mentioned now was very enriching and would provide us with a horizon to act more efficiently,” Campos Neto said. He cited as some of the main topics discussed at the meeting the inflation of services and the anchoring of inflation expectations.

“We also discussed the topic of what influences expectations in terms of the reaction function, whether it is more the final (interest) rate, how much speed influences this,” Campos Neto said.