Central Bank raises interest rates for the third time and Selic rises to 4.25% - Kasamim Noticias
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Central Bank raises interest rates for the third time and Selic rises to 4.25%

Monetary authority makes a new increase of 0.75 percentage points and places the rate at the same level as in February 2020; soaring inflation makes analysts predict Selic at 6.25% at the end of the year

Analysts project that the BC will maintain its policy of raising interest rates until the end of 2021 amid rising inflation

Monetary Policy Committee (Copom) of Central Bank (BC) This Wednesday, the 16th, the basic interest rate of the Brazilian economy rose again, increasing the Selic from 3.50% to 4.25% per year. This is the first time since 2015 that the collegiate has increased the Selic rate in three consecutive meetings. The new increase of 0.75 percentage points was already expected by the financial market and continues the interest rate readjustment policy after almost six years of cuts or freezes at reduced levels. The board had already adjusted the Selic with the same magnitude in March and May, raising the rate from 2% to the current level. The new increase leaves interest rates at the same level as in February 2020. The advance in the Selic rate occurs amid rising inflation, which reached 8.06% in the 12 months ending in May, well above the ceiling of the target of 5.25% pursued by the Bank Plant — with a center of 3.75% and a floor of 2.25%. Analysts even estimated that the authority would resort to an increase of 1 percentage point in the Selic to prevent this year's inflationary pressures from contaminating expectations for 2022, when the BC will have a target of 3.50% — with a variation of 1.5 points percentage up or down. The financial market estimates that the Selic will end 2021 at 6.25% per year, according to the Focus Bulletin released this Monday, 14th. The next meeting of the collegiate will be between the 3rd and 4th of August.

In a note, the Copom stated that it should make a further increase of 0.75 percentage points at the next meeting, raising the Selic to 5% per year, the same level as in October 2019. “However, a deterioration in inflation expectations for the relevant horizon may require a more timely reduction in monetary stimuli. The Committee emphasizes that this assessment will also depend on the evolution of economic activity, the balance of risks and how these factors affect inflation projections”, said the statement. The national monetary authority also stated that it should promote the normalization of the basic interest rate to a level considered neutral, which, according to analysts, is close to 6.5% per year. “This adjustment is necessary to mitigate the spread of current temporary inflation shocks.” The collegiate also stated in a note that inflationary pressure is stronger than expected, and that the risk factors are the rise in commodities and the Brazilian fiscal risk. “Despite the recent improvement in public debt sustainability indicators, the high fiscal risk continues to create an upward asymmetry in the balance of risks, that is, with inflation trajectories above those projected in the relevant horizon for monetary policy”, he informed.

The new increase of 0.75 percentage points had already been signaled by the BC at the last Copom meeting, in May. The realization that variations in Broad Consumer Price Index (IPCA) are more widespread across different economic activities has led analysts to consider the need for the monetary authority to act more incisively. The rise in inflation last month was led by the increase in electricity. In previous months, the inflationary vector was occupied by fuels — especially the Gasoline — and the foods. The new cycle of rising commodities should support the advance of the IPCA over the next few months, despite the market seeing room for the index to cool down. Data Focus Bulletin point out that economists and financial entities project inflation at 5.82% at the end of the year. The negative feeling, however, is beginning to transfer to the 2022 IPCA projections, which went from 3.64% a month ago to 3.78% this Monday — the fifth consecutive week of upward revision.

The rise in the dollar and the appreciation of commodities contributed to the increase in the IPCA from the second half of 2020

The rise in the dollar and the appreciation of commodities contributed to the increase in the IPCA from the second half of 2020

The rise in the Selic rate impacts the formulation of bank interest rates and credit taking in the country. In general, when the basic rate increases, consumption decreases, as the “price of money” becomes higher. The low interest rate policy was adopted as a way of stimulating the economy's recovery, however, longer-lasting inflationary pressures than projected forced a reversal from the end of the first quarter of this year. In an interview with Young pan, Gustavo Loyola, former president of the national monetary authority, stated that the Central Bank “is balancing on thin ice” amid the increase in the Selic at a time when the economy has not yet fully recovered. “We have to be cautious in the process of raising interest rates to avoid a negative result on economic activity. In other words, the Central Bank cannot waste ammunition, it has to get the correct dose of interest rate hikes”, he stated.

Inflation has been rising since the second half of 2020. The IPCA ended last year with a rise of 4.5%, the highest value since 2016. Among the main factors that brought inflation to this point, the spike in commodities with the beginning of the recovery of global economies, mainly in China. The surge in the dollar in the first quarter of this year amid discussions about the 2021 Budget and the risk of a greater deficit in public accounts also contributed significantly to inflationary pressures. The cooling of the currency in recent weeks is pointed out by analysts as one of the factors that should take the IPCA downwards until the end of the year.


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