MercoPress. South Atlantic News Agency

Brazil’s basic interest rate forecasted to increase 50 points to 12.25% in April

The central bank doubles efforts to tame inflation

Brazil Wednesday central bank decision to raise interest rates by 50bps to 11.75% was widely expected but significant for two reasons, according to a report from Capital Economics .

First, policymakers opted against stepping up the pace of tightening in the face of rising inflation (some in the market were expecting a 75bps hike). Second, the accompanying statement, while brief, suggested that further monetary tightening is on the way.

The Bank said that: “Following the process of adjustment of monetary conditions, the monetary policy committee decided, unanimously, to raise the Selic rate to 11.75%, without a bias”.

The reference to a ‘process of adjustment’ signals further tightening over the coming months. This will take a variety of forms, including additional macro-prudential measures (such as higher bank reserve requirements), but it seems that the Selic rate will also be raised further too. Capital Economics anticipated another 50bps hike to 12.25% in April.

The key question, however, is just how far interest rates will have to rise.

Inflation is likely to head higher over the coming months and may even test the upper bound of the BCB’s target range (6.5%) in Q3. But for now at least food prices remain the key driver of rising inflation and, while core pressures will probably build this year, headline CPI is still likely to fall back from around Q4 as the effects of the spike in global commodity prices starts to fade.

Meanwhile, the strength of the Brazilian currency – and the threat that it could lead to widening macroeconomic imbalances – remains a major concern.

Q4 GDP relesased Thursday shows that while growth remains strong (0.7% q/q), it is becoming increasingly unbalanced. The upshot is that while taming inflation (and anchoring expectations) remains the major priority for the BCB, Capital Economics believes that a 50bps hike to 12.25% in April could mark the end of the current tightening cycle in spite of the fact the market expects rates to rise to over 13% this year.