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Brazil Monetary Policy August 2021

Brazil: COPOM delivers largest hike in nearly two decades in August and strengthens hawkish tone

At its 3–4 August meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank—as expected—unanimously decided to raise the benchmark SELIC interest rate by 100 basis points to 5.25%, marking the fourth consecutive hike and the largest since February 2003.

The decision to further tighten its monetary stance reflected the Bank’s efforts to tame spiraling inflation amid the effects of dry weather conditions on food and electricity prices, rising service prices, and higher price pressures for industrial goods. The Bank’s survey of market analysts now forecasts inflation to end 2021 at 6.8% (previously projected: 5.8%) and 2022 at 3.8%. Meanwhile, core inflation lies above the range of what is compatible with the Bank’s inflation targets of 3.75% and 3.50% for 2021 and 2022, respectively. That said, COPOM still considers risks to inflation in both directions: While a potential decline in global commodity prices could exert downward pressure, a possible prolongation of fiscal relief measures could worsen the fiscal trajectory, increasing risk premiums and stoking price pressures in turn.

In its communiqué, COPOM struck a more aggressive hawkish tone compared to previous meetings, signaling the need to take the SELIC rate to a level above neutral, given the deteriorating inflationary environment. For the next meeting in September, the Committee sees another hike of the same magnitude.

Reflecting on the potential path for COPOM’s tightening cycle, economists at HSBC commented:

“Following the monetary policy guidance provided by COPOM, we adjust our SELIC rate forecast to 7.50% (from 7.00%) by end-2021 and end-2022. Our rate path implies another 100 basis-point hike in September, as signaled by the BCB, and smaller hikes of 75 basis points and 50 basis points in October and December, respectively, to conclude the cycle.”

The next monetary policy meeting is scheduled for 21–22 September.

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