Brazil raises its key interest rate to the largest since 2003

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Brazil Central Bank Update

The Brazilian Central Bank implemented the biggest interest rate hike in nearly two decades on Wednesday, raising interest rates by 100 basis points, in order to curb the risk of an inflation spiral.

As the economy recovers from economic recovery, the most populous countries in Latin America are witnessing sharp increases in prices. COVID-19 pandemic, Pinch the family and put pressure on the Central Bank of Brazil or BCB to take action.

Due to the worst drought in nearly a century, weak exchange rates, strong global demand for raw materials, and rising electricity bills, all these have caused Brazil’s inflation rate to exceed 8% in the 12 months ending in June. It is an official The target is 3.75 twice as much as the 2021 percentage.

Wednesday’s decision is consistent with the forecast of economists surveyed by Reuters, who previously expected the BCB’s Selic interest rate to rise from 4.25% to 5.25%, which is the fourth consecutive increase by the central bank.The benchmark is in 2% historical low Until March.

The overall percentage point jump represents an increase of 75 basis points announced after three percentage points. Previous meeting This year is the interest rate setting committee, or Copom. This will be the largest increase since the last increase of 100 basis points in 2003.

The central bank stated that it expects to raise interest rates by another 100 basis points at the next meeting. Among other factors, it cited the “Evolution of Covid-19 Delta Variant” as the “risk of the recovery of the world economy”.

As the commodity boom and pandemic-related bottlenecks in the global supply chain have triggered an international debate about whether the return of inflation is temporary or long-term, some central bank governors are tightening monetary policy.

Russia, Mexico, and Chile have all raised interest rates recently, while the US Federal Reserve is approaching The decision to slow down Its massive monetary stimulus.

BCB, where Gained formal autonomy William Jackson, chief emerging market economist at Capital Investment Corporation, said that this year is at the forefront of radical approaches adopted by emerging markets.

However, he pointed out BrazilGDP is still below the level before the deep recession in 2014.

“This will indicate that the economy is operating below its potential and that monetary policy should be stimulating,” Jackson said. “But given the current threat of inflation, people think it cannot continue for the time being.”

In a country that has experienced price runaway and hyperinflation only a generation ago, monetary policymakers will have to strike a balance between protecting consumers and encouraging growth.

Cristiano Oliveira, chief economist at Banco Fibra, a commercial lending bank, suggested that Copom should speed up interest rate hikes to bring future inflation estimates closer to its target.

“The center of the 2022 inflation target is 3.25%, but the previous year’s inflation should be close to 7.5%. In other words, the central bank has a difficult task before it, which is to reduce the inflation rate by more than 50%.”

Food costs have driven millions of people into starvation, and since the first data series started in 2012, Brazil’s unemployment rate is close to record levels. Transportation and housing Recently it has also become more expensive.

At the same time, low reservoir water levels have affected South American countries’ main source of electricity-hydropower, forcing utility companies to start more expensive thermal power plants.

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