Copom adds 1 percentage point to the Brazilian economy’s basic interest rate to prevent this year’s inflation advance from contaminating prospects for 2022
O Monetary Policy Committee (Copom) do Banco Central (BC) the basic interest rate of the Brazilian economy went up again, this Wednesday, 4th. Selic from 4.25% to 5.25% per year. The dose of 1 percentage point is the most intense upward movement since February 2003 and breaks the sequence of increase of 0.75 percentage point adopted in the last three meetings of the collegiate. The advance leaves the Selic at the highest level since September 2019. The increase in the dose was already expected by the financial market amid the persistence of the upward trajectory of inflation measured by the Broad Consumer Price Index (IPCA), which was 8.59% in the preview of the 12 months ended in July. Analysts expect the pace of increase to be maintained in the next meetings of the monetary authority and that the interest rate ends 2021 at 7%, according to data from the Focus Bulletin released this week. The collegiate has three more meetings in the 2021 calendar and will meet again between the 22nd and 23rd of September.
A electricity assumed the role of the main villain of inflation with the increase of the extra fee of the bill amidst the worst water crisis of the last 90 years. The index is also pressured by the rising price of commodities, especially fuels and food. The median of the survey carried out by the Central Bank of more than 100 financial institutions shows that the outlook for inflation rose to 6.79%, compared to 6.56% last week and 6.07% a month ago. The president of the national monetary authority, Roberto Campos Neto, has already admitted that inflation will close the year above the maximum limit when projecting an advance of 5.8%, and stated that the work is aimed at avoiding contamination of the 2022 perspectives. For next year, the BC has a target of 3.50%, ranging between 2% and 5%. The loading of inflationary pressure in 2021 begins to affect estimates for 2022, with the increase of the IPCA estimate to 3.81% in the Focus Bulletin, compared to an expectation of 3.70% a month ago. Despite the pressure in the short term, economists claim that the monetary authority is able to reverse the process, as long as it maintains a firm stance in the face of the upward trajectory of the IPCA. “You have to do whatever is necessary to control and give confidence. Then you can lower interest rates up front as expectations fall. I think the Central Bank has all the instruments and has the time and conditions to control current inflation and inflation expectations,” he told Young pan the former president of the Central Bank, Henrique Meirelles.
The 2022 inflationary scenario should still be impacted by the strong volatility of the exchange in the middle of the electoral process. The resumption of the services sector from the advance of the population’s immunization against the new coronavirus is also pointed out as a pressure point in the price variation. On the other hand, the normalization of the production chain, after the lack of inputs that affected the industry in 2020 and early this year, and the accommodation of supply and demand – both phenomena of the health crisis on the economy – tend to take part of the strength of the IPCA. Inflation has been at an escalating pace since the second half of 2020. The IPCA ended last year with an increase of 4.5%, the largest variation since 2016.