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Brazil Monetary Policy May 2022

Brazil: COPOM hikes rates for tenth consecutive time in May; brings SELIC rate to early 2017 levels

At its 3–4 May 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—as was largely expected by markets—bringing it to 12.75%. The move, which marked the tenth consecutive hike, pushed the rate to its highest level since January 2017, and amounting to a total 1,075 basis points of rate increases since the tightening cycle began in March 2021.

The decision to further tighten its monetary stance reflected the Bank’s efforts to rein in stubborn increases in inflation stemming from Covid-19-related lockdowns in China and the war in Ukraine—which have exacerbated supply chain disruptions—as well as the tightening of global financial conditions. The Bank upwardly revised its end-2022 inflation forecast to 7.3% (previously projected: 7.1%) and kept the forecast for the end of 2023 unchanged at 3.4%. Meanwhile, underlying inflation continues to lie well above the Bank’s targets of 3.50% and 3.25% for 2022 and 2023, respectively. That said, COPOM sees risks to the inflationary outlook in both directions: a reversal of the commodity price boom and a sharper-than-expected deceleration of economic activity would exert downward pressure on inflation, while persistently high global inflation and uncertainty over the country’s fiscal trajectory—which could increase risk premiums—would push up price pressures.

With regard to forward guidance, the Committee stated in its communiqué that “given its inflation projections and the risk of a deanchoring of long-term expectations, it is appropriate to continue advancing in the process of monetary tightening significantly into even more restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process consolidates and anchors expectations around its targets”. Consequently, the Bank now hinted at an extension of the tightening cycle, with another adjustment in the next meeting, albeit smaller in size. Accordingly, virtually all of our panelists have penciled in a 50–75 basis point increase in Q2.

The next monetary policy meeting is scheduled for 14–15 June.

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