The Central Bank of Brazil recorded its biggest interest rate hike in nearly two decades and has promised another equally important move for December, as it battles weaker inflation expectations and concerns on its own. increasing budgets.
The bank raised the Selic 150 basis points to 7.75% on Wednesday, according to estimates from most economists polled by Bloomberg, and said another hike of the same magnitude would be appropriate at its last meeting of the year.
“In view of the deterioration of the balance of risks and the increase in its inflation projections, this rate is the most appropriate to ensure the convergence of inflation towards the objectives at the horizon considered”, wrote the political decision-makers in a press release accompanying their decision.
Policymakers led by Roberto Campos Neto have been the most hawkish in the world this year, raising the benchmark rate by 575 basis points since March. They are stepping up their monetary tightening campaign after President Jair Bolsonaro offered to bypass a key austerity rule to increase donations to the poor.
Still, there is a risk that they will need to become even more hawkish to prove their credentials in fighting inflation.
“Today’s decision is a decisive step in the right direction and much needed amid the erosion of the fiscal anchor,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs Group Inc. “But unfortunately more is probably needed. Prepare for a double-digit Selic in 2022.”
“The Central Bank of Brazil has stepped up the pace of rate hikes, pledged another large hike in December and indicated that monetary policy would end the tighter cycle than expected. But the key questions – what the BCB thinks of the proposed tax changes and what they mean for neutral rates – remain unanswered. »- Adriana Dupita, Latin American economist
Such a move is likely to have an impact in sectors that have benefited greatly from a recent period of low interest rates, including real estate and the stock market, in addition to increasing the burden of service de Brazil’s debt. It should also slow activity further at a time when some economists warn of the growing risk of a recession next year.
However, it is not guaranteed to boost the real. The currency weakened by more than 3% last week, adding pressure on inflation, as investors digested proposed changes to the spending cap – a rule that limits federal budget growth to the rate of inflation of the previous year. Whether legislators decide to increase the amount of public spending that can be exempt from the cap will be crucial for its performance.
Consumer prices rose 1.2 percent in mid-October, more than all expectations in a Bloomberg survey and the highest for the month since 1995. Annual inflation jumped to 10.34 percent, according to government data released Tuesday.
Central bankers previously expected inflation to peak in September. Most analysts see consumer prices rising 8.96% this year and 4.4% in 2022, above the respective targets of 3.75 and 3.5%. Expectations for 2023 and 2024 also exceeded the target this week.
The last time policymakers made a surge of more than 100 basis points to the Selic was in late 2002, when markets panicked as Luiz Inácio Lula da Silva was about to assume the presidency.
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