Brazil’s central bank assesses costs, benefits of faster hikes

Bloomberg

Brazil’s central bank assessed the costs and benefits of bigger interest rate hikes but concluded that its current pace of monetary tightening would be sufficient to bring inflation back to target.
The current adjustment has already left interest rates in a restrictive level and uncertainties related to the pandemic justify “accumulating more information about the state of the economy and the persistence of shocks,” policy makers wrote in the minutes from their meeting.
Central bankers hiked their key interest rate by a full percentage point for the second consecutive time last week, taking the Selic to 6.25%. They signalled another increase of the same magnitude next month.
“The central bank concluded that, at this moment, maintaining the current pace of adjustment coupled with the extension of the magnitude
of the process of monetary tightening to a significantly restrictive level is the most appropriate strategy for assuring the convergence of inflation to the 2022 and 2023 targets.”
Brazil’s policy makers, led by central bank chief Roberto Campos Neto, have been among the most aggressive in the world, lifting borrowing costs by 425 basis points since March. Still, consumer prices have spiraled higher with inflation reaching 10.05% in mid-September, driven up by rising fuel and food prices. A severe drought is expected to keep electricity bills at their highest level in October, exacerbating the outlook. Analysts see inflation at 8.45% by December and 4.12% next year, both above the central bank’s target.
With the pace of vaccinations speeding up, central bankers see a robust economic recovery in the second half of the year. Costs for industrial goods are expected to remain high while pressures mount on food, fuels and energy prices. A slowdown in Asian economies and a decline in global commodity prices could exert downward pressure on inflation forecasts, central bankers wrote last week.