Brazil’s Central Bank Could Raise Rates to the Highest Level Since 2003


August 2, 2021, | AtoZ Markets- At it is meeting this week, Brazil’s central bank could raise interest rates to their highest level in more than 18 years, according to a Reuters poll. This would be the result of the central bank’s effort to reduce the country’s rising inflation.

The broad-based rise in prices is a major concern, and the Banco Central Do Brasil is expected to take strong measures to tackle it.

Photo by Banco Central Do Brasil

Meanwhile, ahead of the meeting, yields fell across the Brazilian sovereign curve during Monday morning trading. The 1-year yield was down 4bps to 7.407% while the 7-year yield was down 9.7bps to 9.258%.

Meanwhile, the 10-year yield was down 6.3bps to 9.512% and the yield spread between the 1-year and 10-year was 210.5bps, compared to the previous close of 212.8bps.

What Is Expected from the Bank at This Meeting?

Currently, inflation in the Latin American country is well above 8%, a value corresponding to more than double the official target set by the central bank for this year. It is no secret that the country has experienced major weather phenomena that have led to a considerable increase in essential goods and services at an ample pace.

The central bank’s rate-setting committee (COPOM) is expected to raise its benchmark Selic rate to 5.25% from the current 4.25% at its meeting this week, according to 37 of 46 economists responding to a Reuters poll.

This would be Copom’s fourth consecutive hike and the highest since its last 100 basis point increase to 26.50% in February 2003.

“We now expect 100 basis point increases in August and September,” said Cassiana Fernandez, chief Brazil economist at JP Morgan in Sao Paulo.

Brazil is one of the most important countries in Latin America, and for this reason, its economic situation is expected to normalize, after the effects of the pandemic.

What Are the Actual Inflation Figures?

The bank’s year-end inflation target is 3.75% with a margin of error of 1.5 percentage points on each side, and its central target for next year is 3.50%.

However, the currently 12-month inflation value is 8.35%, meanwhile, the Selic rate is 4.25%.

We can say then, that there is no doubt that the situation for the Central Bank of Brazil is very difficult, as it needs to raise its rates, at a time when the economy is not fully stable, to anchor the current inflation figures.

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