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Home Economy

Brazil raises rate 75 bps and sees another hike in May

4 years ago
in Economy, highlights, Home, home-news, latest News
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The Central Bank of Brazil headquarters stands in Brasilia, Brazil on Wednesday, Jan. 18, 2017. Foreign direct investment in Brazil soared to a six-year high in December as investors abroad kept an optimistic view of the country's long-term prospects, the central bank said. Photographer: Gustavo Gomes/Bloomberg via Getty Images

The Central Bank of Brazil headquarters stands in Brasilia, Brazil on Wednesday, Jan. 18, 2017. Foreign direct investment in Brazil soared to a six-year high in December as investors abroad kept an optimistic view of the country's long-term prospects, the central bank said. Photographer: Gustavo Gomes/Bloomberg via Getty Images

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Brazil’s central bank joined the growing number of central banks that are responding to rising inflation by raising its key interest rate for the first time in six years and said it expects to raise its rate again in May unless there is a significant change in inflation projections.

The Central Bank of Brazil (BCB) raised its benchmark Selic interest rate by 75 basis points to 2.75 percent – more than expected by most analysts – in its first rate hike since July 2015 as it began what it said was a “partial normalization process” to reduce the extraordinary degree of monetary stimulus.     

Looking ahead to its next meting, the bank’s monetary policy committee Copom – which was unanimous in its decision – said it expects to continue normalizing its policy and raise the rate by the same amount when it next meets in early May.

Although the rate hike was widely expected due to rising inflation, the monetary tightening represents an important shift in the central bank’s view of the outlook for inflationary pressures.     

At its previous meeting on Jan. 20, Copom’s statement acknowledged rising price pressures but maintained price shocks were temporary and underlying inflation was in line with its inflation target. 

But the minutes from its meeting released on Jan. 26 revealed that some of the members of Copom were starting to consider trimming the extraordinary stimulus released during the COVID-19 pandemic in light of the economy’s improvement.     

The rate hike comes after a monetary easing cycle with 21 rate cuts beginning in October 2016 that ended in September 2020 after 5 rate cuts last year to aid the economy from the pandemic.     

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The central bank’s first gentle tilt toward tightening then arose in December last year when Copom said its forward guidance from August – which said it didn’t foresee any reduction in monetary stimulus unless inflation expectations approached the inflation target – may no longer be needed.     

Brazil’s rate hike comes on the same day Georgia’s central bank also raised its rate to curb inflationary pressures and 10 central banks have now raised their interest rates this year, with Brazil the first major emerging market central bank to make the tightening move.     

In addition to Georgia, the other central banks that have raised rates this year include Mozambique, Armenia, Tajikistan, Zambia, Zimbabwe, Kyrgyzstan and Ukraine, countries that are more susceptible than developed markets to inflationary pressures from food prices and exchange rate movements.

Denmark, a developed market central bank, raised its rate last week but this was mainly a technical adjustment of its monetary policy tools to smooth out fluctuations in money market rates.     

By tightening its policy faster than expected by most analysts – who had pencilled a 50 basis point rate rise – Brazil’s Copom said a faster reduction in the amount of stimulus would improve the odds of meeting its inflation target in 2021, help anchor inflation expectations and is compatible with meeting the inflation target in 2022. 

Brazil’s inflation rate has been accelerating since September last year and rose to 5.2 percent in February from 4.56 percent in January, at the top end of the bank’s 2021 inflation target of 3.75 percent, plus/minus 1.50 percentage point.     

“The various measures of underlying inflation are in levels above the range compatible with meeting the inflation target,” BCB said, adding inflation expectations from the Focus survey of economists are now around 4.6 percent for 2021 – the 10th rise in a row – and 3.5 percent for 2022, and 3.25 percent for 2023.     

On top of rising prices for commodities and food, Brazil’s inflation rate has been propelled higher by a weak currency, which pushes up import prices.     

Last year Brazil’s real fell 30 percent against the U.S. dollar and this year it has fallen another 7 percent to trade at 5.58 today, with the central bank intervening in the foreign exchange market both last month and earlier this month.

Source: centralbanknews
Via: norvanreports
Tags: 2021 inflation targetCentral Bank of Brazil (BCB)COVID-19 pandemicfood prices and exchange rate movementsmonetary stimulusmoney market ratesrising inflation
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