BRASILIA: Brazil delivered the biggest interest rate hike in nearly two decades and pledged an equally large rise in December, warning that the erosion of public finances risks propelling inflation further above target.
The central bank lifted the Selic by 150 basis points to 7.75% as estimated by most economists surveyed by Bloomberg.
In a statement, policymakers wrote an identical hike would be fitting at their final meeting of the year, and that the pace would take inflation to target despite new fiscal risks.
“Recent questioning regarding the fiscal framework increased the risk of de-anchoring inflation expectations,” they wrote. “This implies a higher probability of inflation paths above the one projected under the baseline scenario.”
Policymakers led by Roberto Campos Neto have been the most hawkish in the world this year, raising the benchmark rate by 575 basis points since March.
While the central bank had signalled as recently as Oct 14 that the Selic rate would be increased by a full percentage point at this meeting, president Jair Bolsonaro’s proposal to boost spending beyond a key austerity rule led the bank to speed up its monetary tightening campaign.
While local markets were closed when the bank’s decision was announced, a Japanese exchange-traded fund tracking Brazil’s main stock gauge fell 0.6%, heading for its lowest close since late April.
“Brazil’s central bank (BCB) accelerated the pace of rate hikes, pledged another large increase in December and indicated that monetary policy will end the cycle tighter than previously anticipated.
“But the key questions – what the BCB thinks of proposed fiscal changes and what they mean for neutral rates – remain unanswered, ” said Latin America economist Adriana Dupita.
In the statement, policymakers wrote the pace of consumer price increases remains high and that there’s additional pressure on core inflation.
In such a scenario, it’s appropriate to implement an even more restrictive monetary policy, they added. — Bloomberg