Brazil’s central bank raised its key interest rate for the third time this year – as expected – and said it expects to continue normalizing its monetary policy stance with another rate hike of the same magnitude at its next policy meeting in August to ensure inflation slows to its target by 2022.
The Central Bank of Brazil (BCB) raised its benchmark Selic rate by another 75 basis points to 4.25 percent and has now raised it by 2.25 percentage points since it began tightening its policy stance in March this year with a 75-point hike and followed this with a similar-sized hike in May.
Although the bank’s policy committee, Copom, said it expects to raise the Selic rate by another 75-points on Aug. 4, it warned that a deterioration in inflation expectations “may require a quicker reduction of the monetary stimulus,” adding it’s view would depend on economic activity, the balance of risks and how these affect inflation projections.
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Inflation in Brazil has been rising steadily since May last year and rose to a higher-than-expected 8.06 percent in May, the highest since September 2016, with drought and higher commodity prices adding to the upward pressure from improving demand.
The central bank targets inflation of 3.75 percent this year, plus/minus 1.5 percentage points, and a midpoint target of 3.50 percent in 2022, within the same range. Copom noted inflation expectations for 2021 in the weekly FOCUS survey now stand at 5.8 percent, then 3.8 percent for 2022 and 3.25 percent for 2023.
Copom’s own projections assume a Selic rate that ends this year at 6.25 percent and then 6.50 percent in 2022.
Looking to Brazil’s economy, the bank said recent indicators continue to be better than expected despite the intensity of the second wave of the COVID-19 pandemic and the risks to the recovery have lessened.
