Brazil moves to tame inflation with third interest rate increase of 2021
Brazil’s central bank on Wednesday raised its benchmark interest rate for the third time this year as authorities in Latin America’s largest economy move aggressively to tamp down on rising inflation.
The 75 basis point increase by the Banco Central do Brasil, or BCB, brings the Selic rate to 4.25 per cent, up from a historic low of just 2 per cent earlier this year.
Mirroring several large emerging nations, inflation has emerged as a central concern for policymakers in Brazil as the economy picks up steam and appears to emerge from the worst of the pandemic-induced recession.
Earlier this month, official data for the first three months of this year showed that gross domestic product grew 1.2 per cent from the previous quarter, bringing the size of the economy back to where it was before the pandemic struck and prompting many economists to raise their annual growth forecasts to more than 5 per cent.
Consumer prices have also soared, increasing by more than 8 per cent in the year to May and forcing the BCB to move aggressively to keep both real and expected rates of inflation within its target range of 2.25-5.25 per cent.
The central bank’s own survey of market economists, however, suggests that the inflation rate will remain above the target to the end of this year.
“In short, it seems that the country will face difficulties in wanting to maintain a low inflation target if it starts to grow again, and we may have to see the Selic return to higher levels in the coming years,” said Sergio Vale, chief economist at MB Associados, alluding to Brazil’s historically high interest rate levels.
The real strengthened to less than R$5 to the dollar on Wednesday for the first time since December on expectation of the move.
In its guidance following the rate rise on Wednesday, the BCB signalled that another increase of 75bp was likely in its next decision in August.
“The persistence of inflationary pressure is greater than expected, especially among industrial goods. Additionally, the slow normalisation of supply conditions, the resilience of demand and the implications of the deterioration of the water scenario on electricity tariffs contribute to maintaining high inflation in the short term, despite the recent appreciation of the real,” the BCB said in its decision.
Luciano Rostagno, chief strategist at Mizuho Bank, said forecasts pointed to the Selic rate reaching 6 per cent by the end of the year.
Inflation has risen in almost all the large emerging economies this year as activity resumed. Policymakers also face pressure from rising bond yields in the US, which could push them into raising interest rates by more than they would wish in order to maintain their appeal to bond investors.
The US Federal Reserve released its latest economic forecasts on Wednesday, and its suggestion of tighter monetary policy ahead could add to that pressure.
Shilan Shah, senior economist at Capital Economics, puts Brazil alongside Russia in a small group of emerging markets where inflation has already spooked central banks, forcing them to tighten policy early to retain credibility.
He expects them to be followed by central banks in parts of east Asia, central and eastern Europe and Chile, where economic recoveries are progressing well, and some will begin to raise rates in the coming months.
But for much of the rest of Latin America, Africa and parts of south and south-east Asia, the pandemic will keep economies subdued for longer, holding back inflation and interest rates, Shah wrote in a report on Wednesday.
In Brazil rising prices combined with high unemployment have hit the nation’s poorest citizens, fuelling a surge in hunger that has complicated the Covid-19 crisis.
Additional reporting by Carolina Pulice