Brazil’s central bank expected to raise rates for first time in 6 years

Brazil’s central bank is expected to raise its key interest rate from an all-time low, against a backdrop of concerns about rising prices and an economy hit by a new wave of Covid-19.

The widely anticipated increase would be Brazil’s first in six years, as forecasts for inflation this year overshoot the official target. The decision on the Selic benchmark rate will be announced by the institution’s monetary policy committee on Wednesday evening.

Many economists have pencilled in a rise of 50 basis points or more from the current level of 2 per cent it has been pegged at since August, a historic low in a country that for years had double-digit interest rates as central bankers battled runaway prices.

Some observers believe this is likely to herald the start of a tightening cycle, with further increases in the coming months. 

Alberto Ramos, Latin America chief economist at Goldman Sachs, said a normalisation of monetary policy was “in order” in Brazil, but there was “no reason to hit the panic button at this stage”.

“It’s a balancing act between an economy that’s weak and [inflation] headwinds that have intensified in the short-term,” he said. “They can’t really hike too much because the economy is pretty weak.”

Inflation rose past 5 per cent in February for the first time in four years and is expected to touch 4.6 per cent in 2021, according to a central bank survey of economists published this week, above its objective of 3.75 per cent for the year. 

The Banco Central do Brasil, led by Roberto Campos Neto, will be weighing up the need to keep a lid on this pressure, spurred by higher fuel and food prices, against the potentially damping effect of higher rates on Latin America’s biggest economy. 

With unemployment already elevated, Brazil is in the throes of a second onslaught of coronavirus more deadly than the first, with the daily increase in fatalities hitting a record of 2,841 this week.

Many municipalities have implemented various degrees of lockdowns to curb infections as intensive care wards reach capacity.

A steeper Selic may also provide some support to the exchange rate, which has weakened as investors worry about government spending and borrowing levels. The Brazilian real is among the worst-performing major emerging market currencies this year.

William Jackson, chief emerging markets economist at Capital Economics, said one reason was fiscal concerns, “which have made foreign investors wary about investing in Brazil”.

“The other is that real interest rates are so low, probably minus 1.5 to minus 2 per cent,” he added.

Brazil’s Congress last week approved an $8bn emergency aid bill that paves the way for President Jair Bolsonaro’s administration to relaunch a cash transfer scheme for the nation’s poorest, which is expected to include four monthly payments of R$150 to R$375 ($26-$66).

While there are questions about the government’s commitment to fiscal rectitude ahead of elections next year, the package was broadly welcomed by economists and investors for its limited impact on Brazil’s growing debt pile.

Wednesday’s decision will be the first test for BCB since it was formally granted autonomy this year, a move intended to eliminate the risk of political interference in setting interest rates.

André Perfeito, chief economist at brokerage Necton, said there was speculation that the increase could be as high as 75 basis points.

“The most important thing will be less the increase in Selic itself, but rather the statement,” he added. “The market expects the BCB to indicate the total rate hike cycle and how it sees the political and fiscal dynamics for the coming months.”

Additional reporting by Carolina Pulice