Brazil Central Bank Update

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The Central Bank of Brazil is expected to implement the biggest interest rate hike in nearly two decades on Wednesday, and economists predict a rate hike of 100 basis points to curb the risk of an inflation spiral.

As the economy recovers from economic recovery, the most populous countries in Latin America are witnessing sharp increases in prices. COVID-19 pandemic, Pinch the family and put pressure on the Central Bank of Brazil or BCB to take action.

Due to the worst drought in nearly a century, weak exchange rates, strong global demand for raw materials, and rising electricity bills, all of these have resulted in Brazil’s inflation rate exceeding 8% in the 12 months to June, the official target of 3.75 More than twice the percentage in 2021.

Most economists surveyed by Reuters predict that BCB’s Selic interest rate will rise from 4.25% to 5.25%, which will be the fourth consecutive increase.The benchmark is in 2% historical low Until March. A decision is expected to be made on Wednesday night.

The one-percentage jump will be a step up from the 75 basis points announced three years later. Previous meeting This year is the interest rate setting committee, or Copom. This will be the largest increase since the last increase of 100 basis points in 2003.

The arduous task facing the central bank is to reduce the inflation rate by more than 50%

As the commodity boom and pandemic-related bottlenecks in the global supply chain have triggered an international debate about whether the return of inflation is temporary or long-term, central bank governors in some countries have begun to tighten monetary policy.

Russia, Mexico, and Chile have all raised interest rates recently, while the US Federal Reserve is approaching The decision to slow down Its massive monetary stimulus.

BCB, where Gained formal autonomy William Jackson, chief emerging market economist at Capital Investment Corporation, said that this year is at the forefront of radical approaches adopted by emerging markets.

However, he pointed out BrazilGDP is still below the level before the deep recession in 2014.

“This will indicate that the economy is operating below its potential and that monetary policy should be stimulating,” Jackson said. “But given the current threat of inflation, people think it cannot continue for the time being.”

In a country that has experienced price runaway and hyperinflation only a generation ago, monetary policymakers will have to strike a balance between protecting consumers and encouraging growth.

Cristiano Oliveira, chief economist at Banco Fibra, a commercial lending bank, suggested that Copom should speed up interest rate hikes to bring future inflation estimates closer to its target.

“The center of the 2022 inflation target is 3.25%, but the previous year’s inflation should be close to 7.5%. In other words, the central bank has an arduous task before it is to reduce the inflation rate by more than 50%.”

Since collecting data for the first time in 2012, food costs have driven millions of people into starvation, and Brazil’s unemployment rate is close to record levels. Transportation and housing Recently it has also become more expensive.

At the same time, low reservoir water levels have affected South American countries’ main source of electricity-hydropower, forcing utility companies to start more expensive thermal power plants.