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Brazil Monetary Policy March 2022

Brazil: COPOM hikes rates for ninth consecutive time at March meeting

At its 15–16 March meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank (BCB) unanimously decided to raise the benchmark SELIC interest rate by a further 100 basis points to 11.75%—as was widely expected by market analysts—which marked the ninth consecutive hike. While the decision eased the pace of rate hikes following three successive 150 basis point increases across October–February, it nonetheless pushed the rate to its highest level since early 2017 following a cumulative 975 basis points of rate increases since March 2021.

The decision to further tighten its monetary stance reflected the Bank’s efforts to tame persistently rising inflation amid the effects of drought conditions on food and electricity prices, and the tightening of financial conditions due to the war in Ukraine. The Bank now forecasts inflation to end 2022 at 7.1% (previously projected: 5.4%) and 2023 at 3.4%. 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 “anticipates another adjustment of the same magnitude”, signaling a second 100 basis point rise in a row. As such, the majority of our panelists see rates rising higher in Q2 2022, before the pace of tightening eases towards the end of the year.

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

“BCB signalled it will hike another 100 basis points in May and end the hiking cycle there, in our view. We, therefore, keep our forecast for the SELIC rate to peak at 12.75% in Q2, but we change the hiking pace to 100 basis points in May and on hold thereafter (vs two hikes of 50 basis points in May and June, respectively, before). BCB noted it needs to fight the secondary effects from the current commodities supply shock that surface in a lagged fashion on inflation. It also said that the size of the hiking cycle assumed in its inflation forecasts (12.75%) appears enough for inflation to converge to target.”

The next monetary policy meeting is scheduled for 3–4 May.

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