MercoPress. South Atlantic News Agency

Brazil hikes interest rate to its highest in five years, 12,75%, to fight double digit inflation

Roberto Campos Neto indicated in March that this month’s rate hike would likely end the tightening cycle, which lifted rates from a record-low 2% in March 2021

As anticipated Brazil's central bank, in a unanimous decision, raised interest rates by 1% to 12,75%, the highest in five years, to contain double digit inflation. However policymakers suggested their tenth straight rate increase would not be the last in what has been one of the world’s most aggressive ongoing rate hike cycles.

 “For its next meeting, the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude,” policymakers wrote in the statement announcing their decision.

Central bank chief Roberto Campos Neto had indicated at the end of March that this month’s rate hike would likely end the tightening cycle, which lifted rates from a record-low 2% in March 2021. Still, the orthodox Campos Neto had stressed the central bank was keeping the door open to even higher rates in the event of unpredicted market disruptions.

The war in Ukraine has added to uncertainty in recent months, disrupting global supply chains and sending prices for many commodities soaring. Similarly with China and its aggressive lock up policies to contain the spread of Covida9 wave.

Brazilian consumer prices rose 12% in the 12 months to, far above the 3.5% year-end target for 2022. But the Copom decision made clear that policymakers’ relevant horizon for monetary policy is currently focused on 2023.

Consumer prices are now expected to rise 4.1% next year, according to a central bank survey of private economists, drifting away from the 3.25% official target for next year.

The Copom release also points out that the re-pricing of monetary policy in advanced countries increases uncertainty and generates additional volatility, particularly in emerging economies.

For its next meeting, the Copom foresees as likely an extension of the cycle, with an adjustment of lower magnitude. The heightened uncertainty of the current scenario, the advanced stage of the current monetary policy cycle, and its impacts yet to be observed require additional caution in its actions.