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Brazil Monetary Policy September 2021

Brazil: COPOM hikes rates for fifth consecutive meeting in September

At its 21–22 September meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank (BCB) unanimously decided to raise the benchmark SELIC interest rate by 100 basis points to 6.25%—as widely expected by market analysts—marking the fifth consecutive hike and pushing the rate to its highest level since mid-2019.

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, supply restrictions and higher price pressures for industrial goods. The Bank now forecasts inflation to end 2021 at 8.5% (previously projected: 6.5%) and 2022 at 3.7%. Meanwhile, core inflation continues to lie 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: 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 maintained a similar tone from previous meetings, stating that “at this moment, the COPOM’s baseline scenario and the balance of risks indicate that it is appropriate for the monetary tightening cycle to advance”. For the next meeting in October, the Committee sees another hike of the same magnitude, while the majority of our panelists see rates rising even further by the end of 2021.

Reflecting on the potential path for COPOM’s tightening cycle, Ana Madeira, chief economist at HSBC, commented:

“BCB signalled another 100bp hike at the October meeting, noting the current hiking pace is adequate given this stage of the hiking cycle. It added this would allow time to collect more information on the scenario evolution. We expect BCB to hike 100bp in October and reduce pace in December, with the Selic reaching 8.00% by year-end (vs 7.50% before). We expect inflation pressures to have eased by then and with the decline in growth prospects for 2022, this will open room for a slower hiking pace, in our view.”

Meanwhile, Solange Srour and Lucas Vilela, economists at Credit Suisse, see COPOM tightening its stance at a more rapid and prolonged rate, commenting:

“We maintain our expectation of three more consecutive hikes in the Selic interest rate of 100 bps and one last hike of 50 bps, increasing the rate to 8.25% at year-end 2021 and 9.75% at year-end 2022. Nonetheless, our scenario for inflation remains biased to the upside, and, as a result, risks to the Selic interest rate remain tilted to the upside.”

The next monetary policy meeting is scheduled for 26–27 October.

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