By Jamie McGeever
BRASILIA (Reuters) – Brazil’s central bank will raise interest rates by a full percentage point on Wednesday, according to a Reuters poll, its largest increase since 2003 as policymakers try to prevent this year’s runaway inflation from spilling over into 2022.
With current inflation well over 8% – more than double the central bank’s official 2021 goal – and the worst drought in decades pushing electricity prices sharply higher, the bank is seen accelerating the pace of tightening.
The bank’s rate-setting committee – known as Copom – is expected to lift its benchmark Selic rate to 5.25% from 4.25% at its meeting on Wednesday, according to 37 of the 46 economists who responded the July 26-30 survey.
The other nine went for 75 basis points, with risks mostly tilted toward 100 even as uncertainty mounts over the Delta variant of COVID-19, political tensions in Brasilia, and the economy’s momentum in the second half of the year.
That would be Copom’s fourth hike in a row, and its largest since its last 100-basis point increase to 26.50% in February, 2003.
“We now expect 100bp hikes in August and September,” said Cassiana Fernandez, chief Brazil economist at JP Morgan in Sao Paulo.
“Our models suggest that the Selic rate would need to go up to 7.5% to drive (2022) inflation closer to target, and we believe the central bank will choose to front-load that adjustment,” she said.
Surging electricity costs helped spark the highest monthly rate of inflation in mid-July for 17 years, lifting the annual rate up to 8.60%.
The bank’s year-end inflation goal is 3.75% with a margin of error of 1.5 percentage points on either side, and its central target for next year is 3.50%.
The poll of economists showed the 2021 year-end median forecast rising to 7.00% from 6.50% in July. Some said the Selic will reach 8.50% next year, while others said front-loaded hikes and base effects will pave the way for rate cuts.
(Reporting and polling by Jamie McGeever; additional polling by Gabriel Burin in Buenos Aires; editing by Giles Elgood)
