Brazil's Central Bank raised its benchmark interest rate 150 basis points for the second time running to 9,25%, the highest since 2017, in an effort to contain growing inflation.
It was the seventh straight increase and was supported unanimously by the nine members of Copom, the bank's monetary policy committee, and in the release anticipated that another adjustment of the same magnitude can be expected in the following meeting.
Copom considers that, given the increase in its inflation projections and in the risk of a de-anchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory. Copom will persist in its strategy until the disinflation process and the expected anchoring around its targets consolidates.
The Selic increase was in line with market expectations since twelve month inflation reached 10,67% in October, almost triple the bank's long term target of 3,75%. Not only that, because other indicators such as growth are uncertain as the economy contracted 0,4% in the second quarter and 0,1% in the third.
In its release following the announcement, Copom said that the global outlook is far less favorable with some central banks in advanced economies expressed the need for caution given the increased persistence of inflation. In addition, the possibility of a winter Covid-19 wave and the emergence of the Omicron variant add uncertainty about the pace of recovery in advanced economies.
As to events in Brazil growth indicators released since the last Copom meeting once more posted an evolution moderately below expected. Consumer inflation remains high. Price increases were higher than expected, both in the more volatile components and on the items associated with core inflation.
Inflation expectations for 2021, 2022, and 2023 collected by the bank-s Focus survey are around 10.2%, 5.0%, and 3.5%, respectively, and Copom projections stand at around 10.2% for 2021, 4.7% for 2022 and 3.2% for 2023. This scenario assumes a path in which the Selic rate rises to 9.25% in 2021 and to 11.75% during 2022, ending the year at 11.25%, and drops to 8.00% during 2023
In effect Brazil faces electricity rate hikes, with insufficient rainfall which has left hydroelectric dams half empty, plus uncertainty about president Bolsonaro's reelection bid chances next year, who is trailing Lula da Silva in opinion polls. However Bolsonaro has so far managed to put through congress a bill that will allow him to spend some eleven billion US dollars in Brasil Auxilio, a social welfare program with direct payments of some 400 Reais a month to 19 million families that could make the difference next October.
Copom also anticipates that in the next meeting it forsees another adjustment of similar magnitude, to ensure the convergence of inflation to the bank's targets, which will depend ”on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.