Wednesday, 5 October, 2022

Brazil holds key interest rate

Brazil holds key interest rate

BRASILIA: Brazil's central bank paused its aggressive campaign of interest rate hikes Wednesday, leaving its benchmark rate unchanged after 12 straight increases, even as the United States and other major economies settle into tightening mode.

Citing "risks in both directions to the inflation forecast" for Latin America's biggest economy, the bank's monetary policy committee voted to leave the Selic rate unchanged at 13.75 percent, the highest since January 2017, reports AFP.

The decision was in line with market forecasts.

The committee, which holds its next rate-setting meeting on October 25 and 26, said it "will not hesitate to resume the adjustment cycle if the disinflationary process does not progress as forecast."

Highlighting the high degree of uncertainty for both the Brazilian and world economy, two of the committee's nine members voted for a residual rate hike of 0.25 percentage points, it said in its accompanying statement.

Haunted by a history of hyperinflation, Brazil was among the first countries to start raising interest rates after the monetary easing of the coronavirus pandemic -- and did it in a big way.

Since March 2021, the central bank had rapidly raised its key rate from an all-time low of two percent, including three whopping hikes of 1.5 percentage points from October 2021 to February 2022.

Now, as the US Federal Reserve and European Central Bank shift into full-on tightening, Brazil is easing up on the brakes, hoping inflation is now sufficiently under control.

The decision came the same day the Fed raised its key rate by three-quarters of a point for the third straight time.

The ECB, meanwhile, announced the largest rate hike in its history two weeks ago -- also 75 basis points.

Both central banks indicated more big increases were coming.

Annual inflation remains high in Brazil, at 8.73 percent in August -- well above the central bank's target of 3.5 percent.

But that is down from 12.13 percent in April.

Consumer prices actually fell by 0.36 percent last month, the second straight month in deflationary territory.

Now, the central bank is hoping to resume its focus on growth rather than inflation, wary of over-tightening and tipping the economy into recession.

"Without losing sight of the fundamental goal of ensuring stable prices, this decision aims to smooth fluctuations in the level of economic activity and promote full employment," the statement said.

It underlined, however, that the global economic outlook remains "adverse and volatile," with an "inflationary environment that continues to exert pressure."

Analysts polled by the central bank are currently forecasting Brazil's economy will grow by 2.65 percent this year, but a sluggish 0.5 percent next year -- though they have been growing steadily more optimistic on both.

They meanwhile expect the annual inflation rate to come in at six percent for 2022 and 5.01 percent for 2023, when the central bank's target drops to 3.25 percent.

Surging prices have been hitting Brazilian households hard.

With Brazil heading for elections on October 2, inflation has emerged as a major liability for President Jair Bolsonaro.

The far-right incumbent trails leftist ex-president Luiz Inacio Lula da Silva by 45 percent to 33 percent, according to the latest poll from the Datafolha institute.

An election-year spending spree by the federal government and question marks around both candidates' policy plans have heightened the uncertain outlook for the economy.