Brazil central bank raises interest rate to 5.25%

Renato Frimm

04-Aug-2021

HOUSTON (ICIS)–Brazil’s central bank voted on Wednesday to raise the country’s benchmark Selic interest rate by one full point to 5.25%.

The decision was unanimous and the bank expects another increase of the same magnitude at its next meeting.

The committee emphasises that the future steps of monetary policy may be adjusted to ensure compliance with the inflation target and will depend on the evolution of economic activity, the balance of risks and inflation projections and expectations for the relevant monetary policy horizon.

The bank noted additional global economic recovery risks for external markets resulting from the evolution of the Delta variant of the coronavirus.

Recent indicators for the Brazilian economy continue to show positive results and do not change the current recovery scenario for the second half of this year.

Consumer inflation remains persistently strong and the latest figures around 8.35% are unfavourable. Inflation is well above the midpoint of the central bank’s target of 2.25-5.25%

The various measures of underlying inflation are above the target inflation range.

Inflation is strong for the services industry and pressure from industrial goods continue impacting core inflation.

Additionally, there are new pressures from other volatile components like tariff surcharges and new food price increases resulting from severe cold weather conditions. These combined factors have led to a revision of short-term projections.

The bank said inflation risks exist in both directions. The potential reversal of the increases observed in international commodity prices could provide downward pressure on inflation or at least a partial reprieve. A stronger reversal could support an inflation trajectory below the baseline scenario.

On the other hand, further extensions of fiscal policies in response to the pandemic that put pressure on aggregate demand and worsen the fiscal trajectory could raise the country’s risk premiums.

Inflation expectations for 2021, 2022 and 2023 calculated by the Focus survey are around 6.80%, 3.80% and 3.25%, respectively.

In the base scenario, a trajectory for the interest rate was extracted from the Focus survey with an assumed US dollar to Brazil real (R) exchange rate of 5.15 and evolving purchasing power parity (PPC).

Copom’s inflation projections are based on around 6.5% for 2021, 3.5% for 2022 and 3.2% for 2023.

The base scenario assumes interest rates rise to 7.00% this year and remains at this value through 2022 before falling to 6.50% in 2023.

In the scenario, projections for regulated price inflation are 10% for 2021 and 4.6% for 2022 and 2023.

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