Brazil central bank hikes rates, weighs one more amid election-year spending

BRASILIA — Brazil’s central bank on Wednesday raised interest rates by 50 basis points, as widely expected, and left the door open for a smaller “residual” hike in September, pumping the brakes on an economic recovery as the October election approaches.

The bank’s rate-setting committee, known as Copom, raised its benchmark Selic interest rate to 13.75%, the highest since January 2017, as forecast by 23 of 29 economists in a Reuters poll.

The Brazilian central bank has hiked rates at 12 straight policy meetings from a record-low 2% in March 2021, battling inflationary pressures from global commodity prices and now an election-year spending spree by President Jair Bolsonaro.

“The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting,” Copom wrote in its decision statement, citing “additional fiscal stimuli” as an upside risk in its inflation outlook.

By dropping the firmer guidance used in prior meetings, when further hikes were clearly penciled in, policymakers signaled that their aggressive tightening may have already come to a close, said economist Yihao Lin of Genial Investimentos.

“This is a clear sign that the central bank intends to interrupt the cycle, but due to the heightened uncertainty about the economic outlook, it left that door open,” he said, predicting Copom would keep rates unchanged until May 2023.

Bolsonaro, who trails in opinion polls, added to recent uncertainty by pushing a spending package through Congress last month that bypassed a constitutional budget cap to boost welfare payments until December.

Both right-wing Bolsonaro and his leftist rival, former President Luiz Inácio Lula da Silva, have vowed to continue with higher cash handouts next year, adding to challenges for the central bank as it tries to cool demand.

Brazil’s IPCA-15 consumer price index rose 11.4% in the 12 months to mid-July, but Copom forecast in its statement that inflation would end the year at 6.8%, down from an 8.8% forecast in June, but still far above its 3.5% official target.

Despite some relief from energy and fuel tax cuts, partially limited to this year, Copom stressed in its statement that the relevant horizon for monetary policy is focused on 2023 and now, to a lesser extent, 2024.

Policymakers’ expectations for inflation next year rose to 4.6% in their statement on Wednesday, up from 4% in June, drifting further from the 3.25% official target for 2023.

After saying tax measures “heavily” impacted inflation forecasts across calendar years, Copom made a novel emphasis in its policy statement, highlighting an inflation forecast for the 12 months through March 2024, which stands at 3.5%.

“That was really weird. It was forced. It seems when the (inflationary) impact is upwards, they try to change the rules of the game,” said Patricia Pereira, chief strategist at MAG Investimentos, who warned that markets could react negatively on Thursday. (Reporting by Marcela Ayres Editing by Brad Haynes and Leslie Adler)