Brazil’s central bank will raise interest rates by 100 basis points, the largest in 18 years: Reuters survey

© Reuters. File photo: The Central Bank Headquarters building appeared in Brasilia, Brazil on May 16, 2017. REUTERS/Ueslei Marcelino

Jamie McGiff

Brasilia (Reuters)-According to a Reuters survey, the Brazilian central bank will raise interest rates by a full percentage point on Wednesday, the largest increase since 2003, as policymakers try to prevent this year’s out-of-control inflation from spreading to 2022.

With the current inflation rate well above 8%-more than twice the official central bank’s 2021 target-and the worst drought in decades leading to a sharp rise in electricity prices, the central bank is expected to accelerate its tightening pace.

According to 37 of 46 economists who responded in the July 26-30 survey, the bank’s interest rate setting committee (called Copom) is expected to change its benchmark Selic interest rate from 4.25 at its meeting on Wednesday. % Increased to 5.25%.

The other nine basis points are 75 basis points. Despite the Delta variant of COVID-19, the political tensions in Brasilia and the increased uncertainty of economic momentum in the second half of the year, the risks mostly tend to be 100.

This will be the fourth consecutive interest rate hike by Copom and the largest interest rate hike since the last interest rate hike of 100 basis points to 26.50% in February 2003.

“We now expect to raise interest rates by 100 basis points in August and September,” said Cassiana Fernandez, chief Brazilian economist at JPMorgan Chase in Sao Paulo.

“Our model shows that the Selic interest rate needs to rise to 7.5% to drive (2022) inflation close to the target, and we believe that the central bank will choose to adjust in advance,” she said.

The soaring electricity bill helped trigger the highest monthly inflation rate in 17 years in mid-July, raising the annual rate to 8.60%.

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

A survey of economists shows that the median forecast for the end of 2021 has risen to 7.00% from 6.50% in July. Some people say that Selic will reach 8.50% next year, while others say that an early interest rate hike and base effect will pave the way for interest rate cuts.

(Reporting and voting by Jamie McGeever; additional voting by Gabriel Burin in Buenos Aires; editing by Giles Elgood)

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