RIO DE JANEIRO, BRAZIL – To contain the advance of inflation, the Central Bank’s Monetary Policy Committee (Copom) announced on Wednesday, 22, a net increase of one percentage point in the benchmark interest rate Selic: from 5.25% to 6.25% per year. This is the fifth consecutive increase in the interest rate and is in line with market expectations.
The one percentage point increase was already expected. At Copom’s previous meeting in August, the monetary authority signaled “another adjustment of the same magnitude” this week. The Committee argued that the basic scenario and the balance of risks indicate that a “cycle of interest rate hikes to a level above neutral” is appropriate.
The neutral level of the Selic, which neither stimulates nor restricts economic activity, is considered to be around 6.5% by the market. Adopting a level above neutral aims to slow down the pace of economic growth, while staying below neutral stimulates economic growth.
The change in tone is seen as necessary to contain inflation, which continues to rise. The country’s official inflation index, measured by the Broad Consumer Price Index (IPCA), accumulates highs of 5.67% between January and August and 9.68% in the last 12 months ending in August.
After the release of the August IPCA, the market began to project a hike of more than one percentage point in the Selic, somewhere between 1.25 and 1.50. But a speech by the president of the Central Bank, Roberto Campos Neto, last week put expectations back to around one percentage point. He said he would not change the monetary policy plan.
“We will take the Selic to where it needs to be, but we won’t always react to high-frequency data,” said Campos Neto during participation in BTG Pactual’s MacroDay 2021 event.
The expectation is for new hikes in the Selic until the end of the year. According to the latest Focus Bulletin, the market already estimates that the introductory interest rate may end in 2021 at 8.25%.
At the beginning of the year, the forecast was that it would be at 3% by the end of this year. Inflation should close the year at 8.35%, well above the Central Bank’s target of 3.75%.
In the communiqué, Copom states that “at the current stage of the cycle of interest rate hikes, this pace of adjustment is the most appropriate to ensure the convergence of inflation to the target over the relevant horizon and, simultaneously, to allow the Committee to obtain more information about the state of the economy and the degree of persistence of shocks.
“At this moment, the basic scenario and Copom’s balance of risks indicate that it is appropriate for the monetary tightening cycle to advance in contractionary territory,” says the Committee, anticipating that for the next meeting, it “foresees another adjustment of the same magnitude.