Brazil Lifts Rates to Highest Since 2016 and Cues Smaller Hike
(Bloomberg) — Brazil’s central bank raised its key rate by a full percentage point for the third meeting and cued a smaller hike at its next gathering as policymakers weigh resilient inflation and signs of an economic slowdown.
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Policymakers led by Gabriel Galipolo lifted the benchmark Selic to 14.25% late on Wednesday, the highest level since October 2016. The central bank has now tightened by 3.75 percentage points over its last five decisions.
In an accompanying statement, board members wrote that inflation projections are both elevated and also becoming further unanchored above target. While overall economic activity and the labor market have shown strength, there are signs of “an incipient moderation in growth,” they wrote.
“In light of the continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle, the Committee anticipates an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected,” they wrote.
After their next decision in May, the total size of the tightening cycle will hinge on factors including inflation forecasts and economic data, they said.
Brazil’s central bank delivered more tightening days after a report showed consumer prices posted the biggest monthly surge in three years. Despite signs that growth is easing, with drivers like industry and services ebbing, hefty government spending and a strong jobs market are juicing demand. Put together, markets see inflation above the 3% target through at least 2028.
“The outlook for inflation remains challenging,” said Roberto Secemski, a Brazil economist at Barclays Plc. “The possibility of a more forceful slowdown in activity in the next few months likely influenced their choice as well, so as not to put themselves in a corner.”
Brazil’s borrowing cost increase came hours after Federal Reserve officials held their benchmark interest rate steady for a second straight meeting and transmitted expectations for slower economic growth and higher inflation.
Vague Guidance
Brazil’s central bank had telegraphed its move in December, when it laid out plans for hikes both in January and this month. That guidance signaled a hard-line approach to contain inflation under the leadership of Galipolo, who was tapped by President Luiz Inacio Lula da Silva last year to lead the institution.