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Brazil Monetary Policy March 2021

Brazil: COPOM hikes SELIC rate for first time in over five years, with more likely to come

At its 16–17 March meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank unanimously decided to raise the benchmark SELIC interest rate to 2.75%, from 2.00%—where it had been since August 2020. The hike overshot the expectations of market analysts, who had penciled in a 50 basis-point increase, and marked the first hike since July 2015.

COPOM’s decision reflected intensifying price pressures. Inflation has been on the rise lately, largely owing to the recent recovery in global commodity prices and its impact on fuel prices, in particular. Moreover, the Bank’s survey of market analysts projects inflation to land at 4.6% by end-2021 (previously projected: 3.4%) and 3.5% by end-2022. Meanwhile, core inflation is at levels above what is compatible with the inflation targets of 3.75% and 3.50%, for 2021 and 2022, respectively. That said, COPOM still sees risks to inflation in both directions: A worsening of the health crisis could weigh on the economic recovery and thus also cause downward pressure on prices, while upward pressure could stem from a potential prolongation of fiscal relief measures and setbacks to the reform agenda increasing risk premiums.

In its communiqué, COPOM stated that, given the current backdrop, it no longer deems the current degree of monetary stimulus necessary and thus decided to start a partial normalization process. Moreover, it hinted at another hike of the same magnitude in the coming meeting, should there not be a significant change in the balance of risks or in the inflation projections.

Commenting on the outlook for monetary policy, Alberto Ramos, economist at Goldman Sachs, reflected:

“The COPOM is bent on removing a good portion of the current extraordinary level of the monetary accommodation but is not aiming to go all the way up to rate neutrality. At this juncture, we are penciling in a 75bp hike at the next meeting and the SELIC rate to reach 5.00% by end-2021.”

Meanwhile, analysts at JPMorgan commented:

“We maintain our view that the SELIC rate should reach 5.50% by the end of this year given the remaining political and fiscal uncertainties, on top of stronger inflationary pressures domestically and abroad, and despite the uncertainty on the economic impact of the pandemic in Brazil. Considering the latest communication, after a 75bp hike in May we now look for four installments of 50bp at the June, August, September, and October meetings, leaving the terminal SELIC rate of this cycle at 5.50%, where we expect it to stay up to the end of 2022.”

The next monetary policy meeting is scheduled for 4–5 May.

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