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Brazil Monetary Policy February 2022

Brazil: COPOM hikes rates for eighth consecutive meeting in February

At its 1–2 February meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank (BCB) unanimously decided to raise the benchmark SELIC interest rate by another 150 basis points to 10.75%—as was widely expected by market analysts—which marked the eighth consecutive hike. The decision matched the previous two hikes in October and December 2021 and pushed the rate to its highest level since mid-2017 following a cumulative 875 basis points of rate increases since March.

The decision to further tighten its monetary stance reflected the Bank’s efforts to tame persistently rising inflation amid the effects of dry weather conditions on food and electricity prices, supply restrictions and higher price pressures for industrial goods. The Bank now forecasts inflation to end 2022 at 5.4% (previously projected: 4.7%) and 2023 at 3.2%. Meanwhile, core inflation continues to lie above the range of the Bank’s inflation targets of 3.50% and 3.25% for 2022 and 2023, respectively. That said, COPOM considers risks to inflation in both directions: On the one hand, a potential reversal in global commodity prices could exert downward pressure, while, on the other, a further extension of fiscal relief measures could worsen the fiscal trajectory, increasing risk premiums and stoking price pressures in turn.

In its communiqué, the Committee stated that it now “considers that the reduction in the pace of adjustment of the basic interest rate is more appropriate at this time”, signaling an end to the run of three successive meetings with 150 basis point hikes. As such, the majority of our panelists see rates rising higher in Q1 2022, before the pace of tightening eases towards the end of the year.

Reflecting on the potential path for COPOM’s tightening cycle, Cassiana Fernandez and Vinicius Moreira, economists at JP Morgan, commented:

“We now look for an additional hike of 50 basis points in May, on the top of our expected 100 basis points in March, with a terminal SELIC rate to 12.25% (from 11.75% previously expected). This more hawkish approach from the monetary authority, in the short-term, also leads us to think that the easing cycle can start earlier next year, yet not as soon as anticipated by the markets. Assuming the next government delivers a more pragmatic approach towards fiscal policy outlook, we move our first 50 basis point cut from the beginning of Q2 2023 to the end of Q1 2023.”

The next monetary policy meeting is scheduled for 15–16 March.

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