BRASILIA, June 16 (Reuters) - Brazil's central bank
delivered its third consecutive interest rate increase of 75
basis points on Wednesday and raised the specter of larger hikes
ahead as it returns to "neutral" rates, dropping plans for a
"partial" normalization of policy.
With economic growth much stronger than many had expected
and inflation forecast above the central bank's mandated target
range this year, policymakers signaled that rates are likely to
be raised higher and perhaps more quickly than previously
Wednesday's decision to raise the benchmark Selic rate to
4.25% was exactly as central bank officials had indicated and
all 37 economists in a Reuters poll had predicted.
But with inflation running well above target this year and
threatening to unmoor expectations for next year, the big shift
came in the accompanying statement.
"At this moment, the Copom's (monetary committee's) baseline
scenario indicates, as appropriate, a normalization of the
policy rate to a level considered neutral," policymakers wrote
in their decision, axing mention of "partial" normalization made
in prior months.
"For the next meeting, the Committee foresees the
continuation of the monetary normalization process with another
adjustment of the same magnitude. However, a deterioration of
inflation expectations for the relevant horizon may require a
quicker reduction of the monetary stimulus," they added.
A neutral policy rate is the level of interest that promotes
full employment and maximum economic output without fueling
inflation. In Brazil, economists reckon the neutral rate is
around 3% in real terms, meaning a Selic rate of 6.5% assuming
the central bank meets its 2022 inflation goal of 3.5%.
"The most hawkish point in the statement is the neutral
rate, that they will go straight to the neutral rate," said Jose
Francisco Goncalves, chief economist at Banco Fator in Sao
"But I think it will be higher ... if they don't want to
fall behind the curve, they could go to 7.00%," he said.
Twelve-month inflation is running at 8.1%, well above the
central bank's 2021 goal of 3.75% and even the 5.25% upper limit
of its target range. Surveys show 2022 inflation expectations
now drifting above the bank's 3.50% goal for next year.
Copom said its baseline scenario is for inflation to end
this year at 5.8% and next year at 3.5%. Central bank chief
Roberto Campos Neto said this month that the bank was "100%
committed" to meeting its inflation goals.
A sharp rally by the Brazilian real in the last three months
has helped to ease price pressures. But the stronger currency
has been outweighed by recovering economic activity, hopes that
a pickup in vaccinations will accelerate growth and, recently,
fears that a severe drought will boost energy prices.
Copom said raising the Selic towards the neutral rate is
necessary to prevent what it considers temporary price shocks
from creating broader inflationary pressures.
"However, the Committee again emphasizes that there is no
commitment with this plan, and that future steps of monetary
policy could be adjusted to assure the achievement of the
inflation target," it said.
(Reporting by Jamie McGeever
Editing by Brad Haynes and Cynthia Osterman)