MNI WATCH: Brazil's Copom Set To Accelerate Hiking Pace Again
MNI (BRASILIA) - The Central Bank of Brazil is expected to once again accelerate the pace of its rate hikes, raising the official Selic rate by 75 basis points to 12.00% on Wednesday, following a poor reception for a government fiscal package.
Some analysts are betting on a bigger increase. Former Treasury Secretary Jeferson Bittencourt told MNI in an interview that he believes the central bank is likely to hike by 100 basis points, following a negative market reaction to the fiscal package, partly driven by the perception that the government is unwilling to use its political capital to address the economy’s imbalances. (See MNI INTERVIEW: Copom To Accelerate Rate Hike Pace To 100BP)
The real has fallen to around BRL6 to the dollar from BRL5.81since Finance Minister Fernando Haddad announced in late November a package that includes BRL70 billion in spending cuts over the next two years, together with an increase in the tax threshold for lower earners which he said was balanced by higher rates for the wealthier.
HIGHER FOR LONGER
In this context, BCB will likely keep interest rates higher for longer, said Fundacao Getulio Vargas professor Robson Goncalves, a former central bank economist and researcher, saying the spending cuts announcement was seen as clumsy by both the public and investors. (See MNI INTERVIEW: BCB Hurt By Fiscal ‘Blunder’ - FGV’s Goncalves)
Alexandre Andrade, director at the Independent Fiscal Institution of the Federal Senate, told MNI that the fiscal measures will make it harder for the central bank to combat inflation due to the depreciation of the real. (See MNI INTERVIEW: BCB May Speed Up Hikes After Fiscal Package)
The BCB has already increased the size of its rate hikes to a half-point from a quarter-point in November, leaving the Selic rate at 11.25%.
The board is also concerned about rising inflation expectations, even in the long term. According to the Focus market survey released on Monday, economists’ forecasts for 2024 are at 4.84%, up from 4.62% a month ago, above the 1.5 percentage-point tolerance limit for the 3% target.
For 2025, the forecast increased to 4.59% from 4.10%, and for 2026, to 4.00% from 3.65%.