The Central Bank of Brazil (BCB) is set to raise its benchmark interest rate again on Wednesday by one percentage point, to 11.75%, according to market forecasts, in the face of inflation that is not subsiding and aggravated by the war in Ukraine.
It will be the ninth consecutive increase in the Selic rate since the start of the monetary adjustment cycle exactly one year ago, when the BCB left behind the historical level of 2% maintained for a few months to boost the pandemic-hit economy.
The decision will be announced at the end of a new meeting of the BCB's Monetary Policy Committee (Copom), which starts this Tuesday.
The movement of one percentage point had been anticipated by the Committee at the February meeting and is in line with market expectations, according to a consultation by the newspaper Valor Economico among nearly a hundred consultants and financial institutions.
Since last month, the Selic rate stood in double digits for the first time in five years and reached a level only surpassed by 11.25% in the second quarter of 2017.
However, the monetary authorities foresaw for this meeting a “reduction in the rate of adjustment” in the base rate, despite a “persistence of inflationary”, after applying three 1.5 percentage point jumps since October.
The economic situation worsened after Russia's invasion of Ukraine on February 24.
- Change of scenery -
While maintaining consensus on Wednesday's rise, the market raised its expectations for this year from 12.25% to 12.75% for Selic in a few days, according to the latest BCB Focus survey, which showed estimates multiplied by over 13%.
“The scenario worsened for monetary policy since the previous meeting, with higher inflation and a higher level for Selic, as a result of the military conflict, mainly due to the rise in commodity prices, which was not compensated by the appreciation of the real”, analyzes Mauricio Oreng, Superintendent of Studies Macroeconomics of Banco Santander Brazil.
The dollar price fell to lows in months, to about 5 reais, due to the movement of foreign capital to emerging markets, particularly attracted by high interest rates.
But inflation continued to rise and rose 1.01% in February, the highest for that month since 2015, accumulating 10.54% in 12 months.
The picture worsened last week, when the conflict in Ukraine became palpable for local consumers with a sharp increase in fuels, in response to the international rise in oil prices.
The latest market projection for retail prices in 2022 stood at 6.45%, up from 5.65% a week ago, moving away from the 5% ceiling of the BCB target.
Oreng argues that in the face of the change of scenery, the cycle of monetary adjustment could be extended longer than expected.
Thus, Copom is once again facing the challenge of containing inflation and maintaining growth.
The largest economy in Latin America overcame a brief recession in the last quarter and closed 2021 with an expansion of 4.6%. Now, the forecasts are for a GDP growth of 0.49% by 2022.
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