Brazil reveals biggest interest rate rise in almost 20 years

Brazil’s central bank has announced its biggest interest rate rise since 2002, ratcheting up a fight against inflation that is in the double digits as investors fear a pre-election government spending splurge.

Latin America’s most populous nation is witnessing some of the sharpest price rises among major economies, driven by factors including higher fuel costs, a weakened exchange rate and a drought that has pushed up energy bills.

The Banco Central do Brasil, or BCB, has taken a hawkish stance and on Wednesday stepped up the pace of tightening.

Its monetary policy committee decided unanimously in favour of a 150 basis point jump, up from increases of 100bp at the previous two meetings, lifting the benchmark Selic rate to 7.75 per cent.

The BCB said it foresaw an adjustment of the same magnitude at its next meeting. The central bank has raised rates six times so far this year.

Pressure had been building for a more aggressive response following turbulence in financial markets on growing fears about Brazil’s fiscal discipline.

President Jair Bolsonaro’s push for expanded welfare payments to the poorest, as he gears up for re-election next year, has fed concerns that extra government spending will further add to inflation.

The equities index and exchange rate both fell last week after it emerged that Brasília would seek to circumvent a constitutional cap in order to fund the benefits programme.

The so-called fiscal “ceiling” limits budget increases in line with inflation and is regarded as a pillar of the country’s economic credibility.

“Recent questioning regarding the fiscal framework increased the risk of deanchoring inflation expectations,” the BCB said in a statement.

Gustavo Cruz, strategist at RB Investimentos, said he thought segments of the market would be “displeased” with the outcome.

“It will believe that it wasn’t a sufficient increase to respond to the deterioration of the fiscal side that’s occurred recently, and also to the inflationary pressures that have shown themselves to be more and more lasting and persistent,” he added.

Before the event, Alberto Ramos, economist at Goldman Sachs, argued that a “bold near-term monetary policy response [was] warranted”.

“Not only because of the deterioration of the inflation outlook for 2022 and the overall balance of risks around it, but also because of the . . . damaging effect of lingering financial volatility,” he wrote.

The BCB’s president, Roberto Campos Neto, will have weighed up these risks against the potentially dampening impact of higher rates on economic activity.

Following widespread downgrades to economic growth forecasts for 2022, Brazil’s biggest bank, Itaú, this week predicted that gross domestic product will shrink by 0.5 per cent next year.

Brazil’s consumer prices increased by 10.3 per cent in the 12 months to early October, more than analysts had expected and well above an annual target of 3.75 per cent for 2021. Among G20 nations, only Argentina and Turkey have higher rates of inflation, according to OECD data.

“It is very difficult to say that it has peaked after the [currency] depreciation we saw last week and we expect it to continue in the near term,” said Solange Srour, chief economist at Credit Suisse in Brazil.

Brazil’s lower house of Congress is due to vote on Wednesday on a bill that would lift the fiscal ceiling and delay the payment of certain court-ordered public debts, potentially freeing up about an extra R$80bn ($14bn) for next year’s budget.

Additional reporting by Carolina Pulice in São Paulo

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