Central Bank raises interest rates to new five-year high

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As expected, the Monetary Policy Committee of the Central Bank of Brazil raised the country’s benchmark interest rate by one percentage point on Wednesday evening. It was the tenth consecutive hike, taking the Selic rate from 2% in March 2021 to 12.75% now – the most pronounced monetary tightening process in the world.

According to Focus report, According to a weekly survey by the Central Bank of top-rated investment firms, markets expect the Selic rate to reach 13.25% by the end of the year.

Higher interest rates are used to cool the economy and contain inflation. But despite back-to-back Selic rate hikes, Brazilian consumer prices have climbed 11.3% in the past 12 months – and show no signs of slowing down. The mid-month IPCA-15 consumer price index, which serves as a predictor for the official rate, rose 1.73% in April.

Over the 12-month period, the IPCA-15 crossed the 12% mark.

“Industrial price inflation has not slowed and is expected to persist in the near term, while services inflation has accelerated further,” the Monetary Policy Committee said. “Recent readings have been higher than expected and the surprise has come from both the more volatile components and those associated with underlying inflation.”

Based on these results, the committee concluded that an additional adjustment of one point, followed by an additional adjustment at the same pace, is “the most appropriate strategy” at this time. “However, the committee recognizes the difficult scenario of inflation converging towards its targets and stresses that it will be ready to adjust the size of the monetary tightening cycle, if the scenario develops unfavorably.”

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