Central Bank raises Selic to 2.75% and already foresees new hike
The Monetary Policy Committee (Copom) raised the Selic, Brazil's benchmark interest rate, by 75 basis points, to 2.75% per year. The group of the Central Bank (BC) also said that, unless significant changes occur, it "anticipates" another hike "of the same magnitude" at the next meeting.
"For the next meeting, unless there is a significant change in inflation projections or in the balance of risks, the Committee foresees the continuation of the partial normalization process with another adjustment," it said, in a statement released after the unanimous decision. This new 75 bp increase, however, "will continue to depend on the evolution of economic activity, the balance of risks, and inflation projections and expectations."
In the assessment of the Central Bank, the current conditions "ceased to prescribe an extraordinary stimulus." The monetary authority cited three factors that justified the decision to reduce this stimulus: the fact that GDP ended 2020 "growing strongly at the margin, recovering most of its first-semester drop"; the fact that "inflation expectations rose above target at the relevant horizon for monetary policy", which includes 2021 and, mainly, 2022; and the fact that "inflation projections increased to levels close to the upper bound of the target for 2021." The target for this year is 3.75%, with an interval of 1.5 point more or less.
This "swifter adjustment" strategy brings two benefits, according to the Central Bank. First, it reduces the chance of not meeting the 2021 target. Second, it keeps "longer horizon expectations well-anchored."
"Additionally, the broad set of information available to the Committee suggests that this strategy is consistent with meeting the 2022 inflation target, even if social distancing increases temporarily," it said.
The balance of risks of the monetary authority for inflation continues with factors acting in both directions, but the fiscal risk implies an upward asymmetry to the balance of risks. That is: there are more chances of the inflation trajectory staying above the projected one than below. In the opposite direction, "the worsening of the pandemic may delay the economic recovery, producing a lower-than-expected prospective inflation trajectory."
The Central Bank also continues to consider that the current inflationary shocks "are temporary," but reinforced that they have shown themselves to be stronger and more persistent than expected and that the Copom "continues to closely...
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