Brazil’s Benchmark Rate Tops 10% With 150-Point Boost

(Bloomberg) -- Brazil's central bank signaled the world's most aggressive monetary tightening cycle is closer to an end after delivering its third straight interest rate hike of 150 basis points, taking borrowing costs past 10% for the first time in nearly five years.

Policy makers on late Wednesday lifted the Selic to 10.75% as part of a campaign against inflation that has boosted borrowing costs by 875 basis points since March, the most among major central banks in the wake of the pandemic. In an accompanying statement, board members wrote they intend to slow the pace of rate increases, though they didn't specify by how much.

“The Committee foresees as adequate, at this moment, a reduction in the pace of adjustment of the interest rate,” they wrote. “This indication reflects the stage of the tightening cycle as its cumulative effects will manifest themselves over the relevant horizon.”

Board members led by Roberto Campos Neto are facing persistent increases to inflation expectations even as Latin America's largest economy struggles through recession. Consumer prices rose more than expected in mid-January on supply chain disruptions and costlier commodities. At the same time, analysts surveyed by the monetary authority see growth close to zero this year, with some warning of fresh quarterly declines in gross domestic product.

What Bloomberg Economics Says
“Brazil's central bank delivered a widely expected rate hike and said it anticipates a smaller move at the next meeting -- though it is prepared to adjust that plan should conditions warrant. Despite the hawkish warning, the post-meeting statement brought some relevant dovish signals. This reinforces our call that the cycle will end soon. We project a final, 75-basis-point hike in March.”
--Adriana Dupita, Latin America economist
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Annual inflation in mid-January stood at 10.20% amid widespread pressures, including in core measures. Cost of living increases have surprised negatively, policy makers wrote, highlighting the risk of unanchored price forecasts.

2023 Target

Globally, U.S. monetary policy is shifting gears amid expectations the Federal Reserve may lift its interest rates at least four times in 2022. Such a move would create tighter financial conditions in emerging markets.

Brazil's consumer prices will end 2022 at 5.4%, above the ceiling of this year's target range, the central bank said in the statement. They will then ease to 3.2% at the end of next year, slightly below the current 2023 target of 3.25%. The bank also said that its relevant horizon for monetary policy includes 2022, and, to a larger degree, 2023.

“They don't have to raise borrowing costs much more to get inflation to the 2023 target,” said Tatiana Nogueira, an economist at XP Inc. “They should stop hiking in March.”

Uncertain Activity

Adding to Brazil's economic concerns is the rapid spread of the omicron strain of Covid-19, which is disrupting some retail outlets and services including airline flights. In the statement, policy makers wrote that the recent coronavirus wave adds to uncertainty about the pace of global activity.

Even before considering the surge in infections, there are already signs that the steep rate hikes are crimping domestic demand. Retail sales, which have been a motor of Brazil's growth in the past, have fallen in three of the past six months, while industrial output rose in December for the first time since May.

Put together, short-term interest rate swaps will likely fall when markets reopen on Thursday, as investors digest the central bank's plans to moderate its monetary tightening campaign.

Read more: Brazil Short-End Swap Rates to Drop as BCB Flags Smaller Hikes

“In our assessment, this leaves the door open for a milder Selic hike in March,” said Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. “A more moderate rate hike would be justified by below-trend real GDP growth, uncertain Covid backdrop, lagged effects of recent monetary tightening, and a better anchored real.”