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Brazil Monetary Policy May 2021

Brazil: COPOM raises SELIC again in May

At its 4–5 May meeting, the Monetary Policy Committee (COPOM) of Brazil’s Central Bank unanimously decided to raise the benchmark SELIC interest rate by 75 basis points to 3.50%, which was in line with market analysts’ expectations. The move marked the second consecutive hike and pointed to a continuation of the partial normalization process for monetary policy.

COPOM’s decision came against a backdrop of a continued rise in price pressures. Inflation has risen markedly in recent months, largely reflecting higher commodity prices and their impact on prices for food and industrial goods. Moreover, the Bank’s survey of market analysts now projects inflation to land at 5.0% by end-2021 (previously projected: 4.6%) and 3.6% by end-2022 (previously projected: 3.5%). Meanwhile, core inflation is at the upper end of what is compatible with the Bank´s inflation targets of 3.75% for 2021 and 3.50% for 2022. However, COPOM still sees risks to inflation in both directions: A slower-than-expected recovery from the pandemic could weigh on price pressures, 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 reaffirmed its commitment to the partial normalization process, indicating a further tightening of the same magnitude for the next meeting. That said, the Bank still deems it appropriate to maintain some degree of stimulus to aid the economic recovery.

Commenting on the outlook for monetary policy, economists at HSBC reflected:

“We now see slightly faster policy tightening and forecast the Selic rate at 5.25% and 6.25% by end-2021 and end-2022, respectively, up from 4.50% and 6.00%, previously. Our new forecast path considers another 75bp hike in June, followed by two 50bp hikes in August and September. We still think a frontloading of the tightening cycle could imply a pause in Q4 2021 to assess the evolution of activity and inflation expectations. Given the COPOM’s multi-year approach and its mid-point inflation targets of 3.75% and 3.50% for 2021 and 2022, we see the resumption of the tightening cycle in 2022.”

Meanwhile, Marcos Casarin, Chief Latam economist at Oxford Economics, takes a slightly different view:

“We expect the BCB will raise the Selic policy rate to 6% by year-end and keep it there until at least the October 2022 elections. By frontloading the tightening cycle with more aggressive hikes at the beginning, the BCB should be able to offer some support to the BRL and anchor inflation expectations for 2022 at around its 3.5% target.”

The next monetary policy meeting is scheduled for 15–16 June.

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