Brazil Raises Key Rate by 75 Basis Points, Sees a Repeat in June

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Brazil’s central bank lifted its benchmark interest rate by 75 basis points and promised another hike of the same magnitude in June as it moves to bring inflation forecasts back down to target.

The bank on Wednesday unanimously voted to raise the Selic to 3.5%, in line with estimates from all 39 economists in a Bloomberg survey and also the guidance given by policy makers at their prior meeting in March.

“For the next meeting the Committee foresees the continuation of the partial normalization process with another adjustment of the same magnitude in the degree of monetary stimulus,” the bank’s board wrote in a statement accompanying the decision.

The bank, led by its President Roberto Campos Neto, is acting to rein in inflation that’s surged above the target ceiling to a four-year high. Food and fuel costs have jumped in recent months, and the government recently restarted emergency aid that will firm up demand. Put together, analysts see consumer prices above target this year and next despite an incipient recovery.

What Bloomberg Economics Says

“The central bank tried to reach a compromise: it promised another sharp rate hike (75bps) in the next meeting, but warned that it is not ready yet to fully normalize monetary policy. Despite acknowledging the decline in underlying inflation and mentioning -- for the first time ever -- its dual mandate, we believe that the overall tone of the statement was somewhat hawkish.”

-- Adriana Dupita, Latin America economist

The decision makes room for the real to extend recent gains. The Brazilian currency is the best performer among majors in the past month, up 4.4% amid rising commodity prices. A stronger exchange rate helps fight inflation by making imports less expensive.

Real Has Scope to Gain After BCB’s Hiking Signal: Inside Brazil

“They are continuing the hawkish tilt and suggesting another 75-basis point rate hike is coming at the next meeting,” said Sacha Tihanyi, head of emerging market strategy at TD Securities in Toronto. “Hike aggressively sooner, and then create some breathing space for the real.”

Nearing 8%

In their statement, policy makers wrote future steps of monetary policy could be adjusted to assure the achievement of the inflation target. Higher energy costs are pressuring prices in the short-term, and various measures of underlying inflation are at the top of the range compatible with hitting their goal.

Consumer prices rose 6.17% in the year through mid-April, and many economists see that reading approaching 8% in May. The central bank targets annual inflation at 3.75% this year, with a tolerance range of plus or minus 1.5 percentage points.

Read More: Brazil’s Budget Foreshadows Another Year of Massive Spending

Last month, President Jair Bolsonaro’s administration started paying out another round of monthly stipends at a total cost of 44 billion reais ($8.2 billion). Lawmakers have recently indicated they will seek an extension of that aid if the government does not accelerate plans for a new social program as the coronavirus continues to spread through the country.

“The central bank is signaling it plans to get to a 5% Selic in 75-basis point hikes, though it leaves the space to change its mind,” said David Beker, chief Brazil economist at Bank of America Corp.

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