By Jamie McGeever
BRASILIA (Reuters) – Brazil’s central bank delivered its third consecutive interest rate increase of 75 basis points on Wednesday and, in an attempt to prevent inflation expectations from taking off, dropped its commitment to only a “partial” normalization of monetary policy.
With economic growth much stronger than many had expected and inflation forecast above the central bank’s mandated target this year, policymakers signaled that rates may be raised higher and more quickly than previously planned.
The decision to raise Brazil’s benchmark rate to 4.25% was exactly as central bank officials had indicated and all 37 economists in a Reuters poll had predicted.
The big shift came in the accompanying statement.
“At this moment, the Copom’s baseline scenario indicates, as appropriate, a normalization of the policy rate to a level considered neutral,” policymakers wrote in their decision.
“For the next meeting, the Committee foresees the continuation of the monetary normalization process with another adjustment of the same magnitude. However, a deterioration of inflation expectations for the relevant horizon may require a quicker reduction of the monetary stimulus,” they added.
Twelve-month inflation is running at 8.1%, well above the central bank’s year-end goal of 3.75% and even the 5.25% upper limit of its target range. Surveys show 2022 inflation expectations now drifting above the bank’s 3.50% goal.
Central bank chief Roberto Campos Neto said this month that the bank was “100% committed” to meeting its inflation goals.
A sharp rally by the Brazilian real in the last three months has helped to ease price pressures. But the stronger currency has been outweighed by recovering economic activity, hopes that a pickup in vaccinations will accelerate growth and, recently, fears that a severe drought will boost energy prices.
Copom said its baseline scenario is for inflation to end this year at 5.8% and next year at 3.5%.
(Reporting by Jamie McGeever; Editing by Brad Haynes)
