Brazil’s central bank is poised to raise interest rates for the fifth consecutive time this year, in a battle to contain inflation which has almost touched double digits.
A global commodities rally, the worst drought in nearly a century and a weakened currency have contributed to sharp price rises for everything from food to fuel, hitting millions of people in Latin America’s largest economy.
As monetary policymakers around the world consider how best to manage higher inflation fanned by the lifting of Covid-19 restrictions, the Banco Central do Brasil, or BCB, is among the most aggressive in emerging markets when it comes to tightening.
Its multiple rate rises place it in the camp of inflationary hawks along with Russia. Central banks in Mexico, Chile, Peru and South Korea have all increased borrowing rates recently, too.
Ahead of the BCB’s decision on Wednesday evening, many economists predict it will raise the benchmark Selic rate by 100 basis points to 6.25 per cent, following a rise of the same amount last month.
One economist, Gustavo Arruda at BNP Paribas, argued the BCB should go further: “We believe the BCB should raise interest rates by 150 bps in this meeting. A combination of more widespread inflation and inflation expectations deviating from the target should give rise to even faster actions.” However, he noted that an increase of that magnitude was less likely.
The anticipated rise comes after annual inflation reached 9.68 per cent last month, as measured by the consumer price index, well above the BCB’s objective of 3.75 per cent for 2021. The 0.87 per cent month-on-month increase was the biggest for August since 2000.
Among the G20 countries, only Argentina and Turkey are projected to have higher inflation than Brazil this year, according to OECD calculations.
Political tensions between president Jair Bolsonaro and supreme court judges have weighed on the Brazilian real in recent months, along with fiscal concerns ahead of elections next year. This translates into higher domestic prices for goods that are quoted in dollars on international markets.
Having already pushed the Selic up from an all-time low of 2 per cent this year, the BCB’s governor Roberto Campos Neto has pledged to do “whatever it takes” to bring inflation back to target.
In a country scarred by experiences of runaway prices, it will involve a balancing act between controlling the money supply and accommodating increasing demand, even as the outlook for the economy worsens.
Unemployment remains elevated and analysts have successively downgraded Brazil’s GDP growth forecasts to 1.6 per cent in 2022, according to a central bank survey, following a 5 per cent expansion this year.
As economies around the world recover from coronavirus shutdowns, there is a debate about whether higher sustained inflation is here to stay or a transitory phenomenon, resulting from supply chain bottlenecks and the release of pent-up demand.
Environmental factors have also contributed in Brazil. A lack of rainfall across southern and central states has depleted reservoirs on which the country relies for the hydroelectricity generation that provides the bulk of its power supply, forcing utilities to switch on more expensive thermal plants. Economists have pencilled in inflation of 4.1 per cent next year.
“There will be only partial control of inflation in 2022,” said João Leal, economist at Rio Bravo Investimentos. “No country has had a series of persistent shocks as intense as Brazil”.
Additional reporting by Carolina Pulice
Source: Economy - ft.com
