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Brazil Puts 14% Rate in Sight After Locking in More Tightening

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·4 min read
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(Bloomberg) -- Brazil raised its key interest rate by half a percentage point and signaled another hike in August, leaving the end to its aggressive monetary tightening campaign in the balance as 2023 inflation forecasts surge above target.

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The central bank lifted the Selic to 13.25% on Wednesday, extending a cycle that’s boosted rates 11.25 percentage points since March 2021. In a statement, policy makers wrote it’s appropriate to tighten policy “significantly into even more restrictive territory” given the unfavorable consumer price outlook.

“For its next meeting, the Committee foresees a new adjustment, of the same or lower magnitude,” policy makers wrote. “The Committee stresses that the growing uncertainty of the current scenario, coupled with the advanced stage of the current monetary policy cycle, and its impacts yet to be observed, require additional caution in its actions.”

The central bank, led by Roberto Campos Neto, is grappling with more expensive food and energy which have kept annual inflation above 10% since September. While economic growth remains fragile and cost of living increases cooled in May, price pressures remain widespread. Policy makers must also weigh congressional proposals that would lower fuel taxes this year but add to inflationary pressures in 2023.

“The central bank wants to stop hiking, but inflation isn’t letting them,” said Reinaldo Le Grazie, a former central bank director and current CEO of Panamby Capital. “They are close to the end of the cycle which should wrap up with the Selic at an appropriate level between 13.5% and 14%.”

David Beker, an economist at Bank of America Corp, considered the central bank statement hawkish. “My call is 13.75% for the terminal rate, but there are still upside risks,” he said.

Brazil’s rate hike came hours after the Federal Reserve raised its key rate by 75 basis points -- the biggest increase since 1994 -- and Chair Jerome Powell said officials could move by that much again next month or deliver a smaller half-point boost. In Latin America, Mexico’s central bank is mulling a record rate increase of 75 basis points at its June 23 policy meeting.

What Bloomberg Economics Says

“Brazil’s central bank slowed the pace of tightening and indicated it sees at least another rate hike in the cycle. The tone of the post-meeting statement suggests the Brazilian central bank is becoming more worried about the external scenario, inflation and deanchored inflation expectations -- all hawkish nods. A vague comment on the federal government’s initiative to cut taxes on fuel and other key prices shows it isn’t particularly worried about the fiscal risks.”

-- Adriana Dupita, Brazil economist

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Inflation is one of President Jair Bolsonaro’s main headaches as he runs for re-election in October, with Brazilians increasingly blaming him for spikes in the cost of living. In a bid to cushion the blow, his government is asking supermarkets to hold down prices, besides pushing legislation that would reduce fuel taxes.

Annual inflation stood at 11.73% in May, well above targets of 3.5% for this year and 3.25% for 2023.

Faster Growth

In the statement, policy makers wrote that Brazil’s consumer prices continued to surprise negatively, both in core and non-core measures. Their inflation forecasts for this year and next stood at 8.8% and 4%, respectively.

Complicating matters further, the global economy has been marked by “strong and persistent” inflation pressures, they wrote. Meanwhile, recent indicators suggest the local economy is growing faster than policy makers expected.

“We have been surprised by results in industry and commerce,” said Laiz Carvalho, a Brazil economist at BNP Paribas. “Today we expect two consecutive rate hikes of 50 basis points.”

Going forward, there are no shortages of economic headwinds. Outstanding consumer debt remains at record levels with analysts warning about rising default rates. Unemployment is sliding but informality is high and wage increases have failed to make up for lost purchasing power.

Brazil’s gross domestic product will likely contract in the third quarter on the eve of elections, according to a Bloomberg survey of economists published in May.

Despite the challenges, the bank recognized that fiscal policies being weighed now would make it more difficult to bring inflation to target next year, according to Fernando Fenolio, chief economist at Wealth High Governance.

“Put together, it wasn’t possible to announce the end of the monetary tightening cycle,” he said. “Our call is for a new hike of 50 basis points, but the environment is uncertain and the central bank will have to be more careful.”

(Recasts story, adds details from central bank statement starting in second paragraph)

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