Central Bank of Brazil raises interest rate 1 percentage point, to 12.75%

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Central Bank of Brazil raises interest rate 1 percentage point, to 12.75%

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Brasilia (AFP) – The Central Bank of Brazil (BCB) once again increased its reference interest rate by one percentage point to 12.75% on Wednesday, placing it at its highest level since February 2017, to combat high inflation.

The rise, communicated at the end of a meeting of the Monetary Policy Committee (Copom), is the tenth consecutive since the start of the upward cycle in March 2021, when the Selic stood at a historical low of 2%.

“Consumer inflation continued to surprise negatively,” the Committee said in a statement, replicating its observation from last March.

“This surprise occurred both in the most volatile components and in the items associated with core inflation” or with less variation, expanded the Copom.

The new movement, already foreseen by the monetary authority and in accordance with the market consensus, is of the same magnitude as that of March, when the Committee moderated the pace of the escalation in relation to the three previous jumps.

The Selic thus reached its highest level since February 2017, when it stood at 13%.

It is, however, one of the last increases in the rate of this monetary tightening cycle, which the BCB authorities have extended to try to ward off skyrocketing inflation.

“For the next meeting (in June), the Committee sees an extension of the cycle (of hikes) as likely with an adjustment of lesser magnitude”, indicated the Copom in its note, in which, however, it pointed out that the current situation of uncertainties requires greater caution.

“inflationary pressures”

The 12-month inflation rate as of March was 11.30%, the highest since October 2003, after a new surge in international fuel and food prices due to Russia’s invasion of Ukraine on February 24.

The consumer price rise forecasts for the end of this year rose in the last week to 7.89% from 6.97% a month ago, according to the BCB Focus survey, which gradually stretches the distance with the ceiling of the inflation target of 5% of the monetary authority.

“The external environment continued to deteriorate. The inflationary pressures derived from the pandemic intensified with the supply problems derived from the new wave of covid-19 in China and the war in Ukraine,” the Committee warned in justifying its decision.

The Copom has set an objective for inflation to converge with the goal in 2023, a year for which an inflation of 4.10% is expected, according to the Focus survey.

Hence, some consultants and financial entities estimate that the increases could take the Selic up to 13.25% this year, or even more.

As a consequence of the rate hike, GDP growth prospects have dimmed to just 0.70% this year, after closing 2021 with an expansion of 4.6%.

A man holds two 100-real bills after they were issued by the Brazilian Central Bank in Brasilia on September 2, 2020. Sergio Lima AFP/Files

“This new increase in interest rates further compromises economic activity, which is already showing clear signs of weakness,” said Robson Braga de Andrade, president of the National Confederation of Industry (CNI), quoted in a statement.

The monetary adjustment, he added, “worsens the expectations for economic growth in 2022, with adverse effects on production, consumption and employment.”

Also motivated by the fight against inflation, the US central bank (Fed) raised its reference interest rates this Wednesday by half a percentage point, to a range of 0.75% to 1%, in the first increase of this magnitude since the year 2000.

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