Brazil raises rate 8th time, to slow pace of tightening

• “​I n 24 4 th meeting, the Cop om continuously decided to increase the Selic rate by 10.75 % pa

The following observations provide an update of the Copom’s reference scenario:

• Regarding the global outlook, the environment remains less favorable. More persistent inflation increases the chances of faster monetary tightening in the US, turning financial conditions more challenging for emerging economies. In addition, the recent Covid-19 wave adds uncertainty about the pace of activity, and at the same time could delay the normalization of the global supply chains;
• Turning to the Brazilian economy, growth indicators of the Q4 posted a slightly better than expected evolution, especially in labor market data;
• Consumer inflation continued to surprise negatively. These surprises occurred both in the more volatile components and particularly on the items associated with core inflation;
• The various measures of underlying inflation are above the range compatible with meeting the inflation target;
• Inflation expectations for 2022 and 2023 collected by the Focus survey are around 5.4%, and 3.5%, respectively; and
• The Copom’s inflation projections in its reference scenario, with interest rate path extracted from the Focus survey and exchange rate starting at USD/BRL 5.45* and evolving according to the purchase power parity (PPP), stand around 5.4% for 2022 and 3.2% for 2023. This scenario assumes a path for the Selic rate that rises to 12% in the first half of 2022, ends the year at 11.75%, and drops to 8.00% during 2023. In this scenario, inflation projections for administered prices are 6.6% for 2022 and 5.4% for 2023. The energy flag is assumed to be “red level 1″ in December of 2022 and 2023.

The Committee emphasizes that risks to its reference scenario remain in both directions.

On the one hand, a possible reversion, even if partial, of the increase in the price of international commodities measured in local currency would produce a lower-than-projected inflation in the reference scenario.

On the other hand, fiscal policies that imply additional impulses to aggregate demand or deteriorate the future fiscal path may have a negative impact on prices of important financial assets as well as pressure the country’s risk premium.

In spite of the more favorable public accounts data, the Committee assesses that the uncertainties regarding the fiscal framework maintain elevated the risk of deanchoring inflation expectations and, therefore, the upward asymmetry in the balance of risks. This implies a higher probability of inflation paths above the one projected under the reference scenario.

Taking into account the balance of risks, and the broad array of available information, the Copom Committee referenced scenario decided to increase the Selic rate by 1.50 pp to 10.75% pa The judges that this decision reflects its reference for prospective inflation, a higher-than-usual variance in the balance of policy risks and is consistent with the convergence of inflation to its target throughout the relevant horizon for monetary policy, which includes 2022 and to a larger degree, 2023. Without compromising its fundamental objective of ensuring inflation price stability, this decision also implies smoothing of economic fluctuations and fosters full employment.

The Committee considers that, given the increase in its inflation projections and in the risk of a deanchoring of long-term expectations, it is appropriate to advance the process of monetary tightening significantly into the restrictive territory. The Committee emphasizes that it will persist in its strategy until the disinflation process and the expectation anchoring around its targets consolidate.

For its next steps, the Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate. This indication reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon. The Copom emphasizes that its future policy steps could be adjusted to ensure the convergence of inflation towards its targets and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy.

The following members of the Committee voted for this decision: Roberto Oliveira Campos Neto (Governor), Bruno Serra Fernandes, Carolina de Assis Barros, Fernanda Magalhães Rumenos Guardado, João Manoel Pinho de Mello, Maurício Costa de Moura, Otávio Ribeiro Damaso, and Paulo Sergio Neves de Souza.”

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