Brazil to Bid Goodbye to Single-Digit Rates: Decision Day Guide

(Bloomberg) -- Brazil's central bank is expected to lift the benchmark interest rate above 10% for the first time in nearly five years, and perhaps signal that it's ready to start moderating the world's most aggressive monetary tightening campaign.

All but one of 41 economists surveyed by Bloomberg expect policy makers to deliver a third straight increase of 150 basis points to the Selic, lifting it to 10.75%. One analyst expects a smaller, 125 basis-point boost. It will be Brazil's first rate decision of 2022, following hikes that totaled a whopping 725 basis points last year, the most among major central banks. 

Policy makers led by Roberto Campos Neto are now struggling with persistent price increases and weakening activity in Latin America's largest economy. Inflation expectations for this year and next are again on the rise after prices jumped more than forecast in the beginning of January, fueled by costlier food and continued disruptions in global supply chains.

What Bloomberg Economics Says

“Communication will be particularly tricky at this meeting. Markets may read any signal the cycle is nearing its end or that future rate moves will be smaller as dovish -- jeopardizing the BCB's goal to re-anchor expectations. Pledging another 150-basis-point hike in March without explicitly saying that will end the cycle may fuel bets on a higher terminal rate.”

-- Adriana Dupita, Brazil Economist

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Wednesday's decision will be published on the bank's website after 6:30 p.m. local time in Brasilia together with a statement from its board, which currently has eight voting members given that Fabio Kanczuk's term as director ended in December and he hasn't been replaced yet.

These are the things to look for:  

Cycle's End

With the 150 basis-point rate hike fully priced in by markets, investors will turn their attention to how soon the tightening cycle will end. 

Until now, most Brazil analysts predict two additional rate rises of a smaller size after this week's decision, according to a weekly central bank survey. It shows expectations that policy makers would lift the Selic to 12% by May and then keep it unchanged until December, when the rate would fall to 11.75%. 

There's speculation Campos Neto could leave his options open without committing to a specific hike in March, discontinuing the detailed forward guidance the bank has given since early 2021.  

“The economic outlook is too uncertain, and this could give central bankers more freedom for their next decision,” said Tatiana Nogueira, economist at XP Inc. Complicating the outlook further, the U.S. Federal Reserve is likely to hike its interest rate as soon as March, a move that would translate into tighter monetary conditions for emerging markets. 

Wednesday's statement may shed light on the bank's strategy to “persevere” in a “significantly restrictive” cycle until inflation expectations anchor.  

“The central bank has recently changed the wording of its communication to reinforce its commitment to persevere with its strategy until the disinflation and anchoring of inflation expectations consolidate,” Cassiana Fernandez, an economist for JPMorgan Chase & Co, wrote in a research note. “The inflation outlook hasn't improved.”

Inflation Forecast

Markets will be eager to see if the bank raises its 2022 inflation forecast closer to 5%, the ceiling of the tolerance range. Such a move, along with stronger references to 2023 as the relevant time horizon for monetary policy, could signal greater odds of missing this year's target.

Annual inflation hit 10.20% in mid-January, as price increases remained widespread. Costs of manufactured goods including vehicles have been pressured by global supply-chain disruptions, and core inflation remains in the double digits. 

Most analysts see consumer prices increasing 5.38% this year and 3.50% in 2023, above the central bank's targets of 3.50% and 3.25% for each year, respectively. “The picture at the beginning of the year is worse than what we expected, and worse than what central bankers thought,” said Mirella Hirakawa, an economist at local investment firm AZ Quest.

Global Outlook

Investors expect policy makers to give more detailed views on the impact of forthcoming U.S. rate hikes on domestic activity. Their balance of risks is also likely to include references to the Covid-19 crisis, as the omicron variant surges in Brazil. 

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