Brazil Readies Another 100 Basis-Point Rate Hike: Decision Guide
Brazil’s central bank will likely lift its benchmark interest rate by a full percentage point for the second straight meeting, as policy makers pledge aggressive action to tame above-target inflation expectations.
Nearly all 34 economists surveyed by Bloomberg News expect the bank board to raise the Selic to 6.25% on Wednesday. Three analysts see a 125 basis-point hike, while one forecasts a rise of 150 basis points. Most traders in the local derivatives market also bet on a full percentage point increase.
Annual inflation is careening toward 10% as a severe drought pressures electricity bills and the Brazilian currency fails to strengthen due to public spending concerns. Central bank President Roberto Campos Neto has tempered bets of an even larger rate hike for now by saying last week that the board won’t react to each piece of high-frequency data. Still, economists have lifted for three straight weeks their forecasts for the Selic at the end of 2021 and 2022.
What Bloomberg Economics Says
“An increasingly challenging inflation outlook may prompt Brazil’s central bank to signal a more hawkish monetary policy stance at Wednesday’s meeting, while sticking to its plan for a full-percentage-point rate hike. The shift in tone would buy policy makers valuable time as they observe how fiscal and growth risks evolve in the coming months.”
--Adriana Dupita, Latin America Economist
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Wednesday’s decision will be published on the central bank’s website after 6:30pm local time in Brasilia, together with a statement from the bank’s board. These are the key things to look for:
Investors will seek clues on the size of borrowing cost increases at the final two meetings of the year, as inflation expectations remain above target for 2022.
In August, the bank board signaled a “quicker monetary adjustment” was appropriate and accelerated the pace of borrowing cost increases. Most analysts now expect policy makers to remain on that path for some time.
“They will try to avoid any comment that can be perceived as dovish, as they are trying to tame inflation expectations,” said Alexandre de Azara, chief economist for UBS BB, an association between UBS Group AG and Banco do Brasil SA. He forecasts two more full-percentage-point hikes this year. “They are already acting hawkish.”
Policy makers’ key rate guidance will hinge on their inflation expectations, especially for next year.
Brazil’s consumer price outlook deteriorated since the previous policy meeting, with costs rising in eight out of nine product and service categories in August. Analysts surveyed by the central bank see annual inflation at 4.1% in 2022, above the 3.5% target.
As pressures prove to be widespread, central bankers are likely to keep their commitment to do whatever it takes to get prices back to target.
“It’s going to be important to understand what’s their short-term projection for inflation, for us to know if central bankers will be surprised on the upside or the downside,” said Cassiana Fernandez, chief Brazil economist for JPMorgan Chase & Co.
Rising inflation expectations are driving some analysts to bet on a steeper rate increase.
Barclays Plc still sees a 125 basis-point hike on Wednesday -- though confidence in that call admittedly declined after Campos Neto’s remarks -- and then less aggressive rate increases going forward, taking the Selic to 8% by December. Such a strategy would be consistent with previous front-loading rate adjustments that central bankers have made, according to Roberto Secemski, that bank’s Brazil economist.
Investors are likely to examine central bank commentary on the fiscal outlook, which may create upward pressures on inflation by weaking the currency and increasing the price of imports.
President Jair Bolsonaro plans greater social outlays ahead of next year’s general election, which could jeopardize the country’s spending cap rule. Those efforts have prompted jitters in financial markets, though Campos Neto said last week that the country’s fiscal backdrop isn’t bad.
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