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Brazil Monetary Policy June 2021

Brazil: COPOM hikes SELIC for third time in a row in June; turns more hawkish

At its 15–16 June meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank delivered its third consecutive hike—as expected—when it unanimously decided to raise the benchmark SELIC interest rate to 4.25% from 3.50%.

The decision to once again raise the rate chiefly reflected the Bank’s efforts to contain rising inflationary pressures amid resilient demand dynamics, the slow normalization of supply conditions and the effect of dry weather on electricity tariffs. The Bank’s survey of market analysts now forecasts inflation to end 2021 at 5.8% (previously projected: 5.0%) and 2022 at 3.8% (previously projected: 3.6%). Meanwhile, core inflation is 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 sees risks to inflation in both directions: While a potential drop in global commodity prices could weigh on price pressures, a possible prolongation of fiscal relief measures and setbacks to the reform agenda increasing risk premiums could exert upward pressure.

In its communiqué, COPOM struck a more hawkish tone compared to previous meetings, dropping the plan for a partial normalization process and instead signaling that it intends to take the SELIC rate back to a neutral level. For the next meeting in August, the Committee sees another hike of the same magnitude, although it hinted that a further deterioration of inflation expectations for next year could prompt it to raise the rate higher and more quickly than initially planned.

Commenting on the potential path for the SELIC rate, Alberto Ramos, economist at Goldman Sachs, reflected:

“At this juncture, we are penciling in a 75bp hike at the next meeting (with a 33% probability of a larger +100bp increase) and a steady and relatively swift climb towards broad policy neutrality, with growing risk of a 7% SELIC handle in 2022.”

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

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