Brazil’s central bank leaves end of rate hikes up in air

Bloomberg

Brazil’s central bank raised its benchmark interest rate by a full percentage point and opened the door to a longer monetary tightening campaign, with another likely increase of smaller size in June to battle rampant inflation.
Policy makers lifted the Selic to 12.75%, extending total hikes to borrowing costs since last year to a whopping 10.75 percentage points. In an accompanying statement, they wrote that future monetary policy steps could be adjusted to ensure inflation eases to target.
“For its next meeting, the Committee foresees as likely an extension of the cycle, with an adjustment of lower magnitude,” they wrote. “The Committee emphasises that it will persist in its strategy until the disinflation process consolidates and anchors expectations around its targets.”
Policy makers led by Roberto Campos Neto are grappling with persistent shocks that sent consumer prices rising more than 12% in early April. Fuel became more expensive in the wake of Russia’s invasion of Ukraine and now public servants are demanding higher wages. Economists, anticipating that Brazil will require even more aggressive tightening, have lifted their inflation forecasts further above target.
“At no point in the statement does the central bank say it’s going to stop” raising rates, said Caio Megale, chief economist at XP Inc. “It’s a tougher statement than what the market was expecting. It leaves the door open for perhaps a longer and more intense
adjustment.”
The guidance marks an important shift from the central bank’s previous communication signalling intentions to wrap up the tightening cycle this week.
Brazil’s decision came hours after the US Federal Reserve increased rates by a half percentage point, its biggest hike since 2000.
In Latin America, Chile is expected to raise borrowing costs as annual inflation approaches double digits, while Colombia lifted rates to a five-year high last week.
A bigger-than-expected slowdown in economic activity represents a top downside risk to inflation, according to the central bank statement. Additionally, Brazil will be gearing up for presidential elections in October, with politics making it more difficult to continue hiking, according to Gustavo Pessoa, a partner at Legacy Capital.
Brazil’s consumer prices will rise 7.89% this year and 4.1% next, according to the central bank’s latest survey of economists. Policy makers target inflation at 3.5% and 3.25% in 2022 and 2023, respectively.