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Brazil Monetary Policy December 2021

Brazil: COPOM hikes rates for seventh consecutive meeting in December

At its 7–8 December 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 9.25%—as widely expected by market analysts—which marked the seventh consecutive hike. The decision matched October’s hike and pushed the rate to its highest level since mid-2017 following a cumulative 725 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 2021 at 10.2% (previously projected: 9.5%) and 2022 at 4.7%. 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, asserting 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 further into contractionary territory”. For the next meeting in early February 2022, the Committee sees another hike of the same magnitude, while the majority of our panelists also 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, Ana Madeira, chief economist at HSBC, commented:

“We expect a decline in the hiking pace to 100bp in February with a terminal SELIC at 10.25% and 9.75% by year-end. BCB signalled the same pace in February, but introduced a data-dependent angle noting it will follow that path “until disinflationary process consolidates and inflation expectations anchor”. It also eased the wording when mentioning the future policy path to ensure “convergence” with target (vs “compliance with target” before). Our call considers that inflation expectations should, at least, have stabilized by February as we expect inflation yoy to start decelerating after November.”

The next monetary policy meeting is scheduled for 1–2 February.

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