By Marcela Ayres
BRASILIA (Reuters) -Brazil’s central bank raised interest rates by a greater-than-expected 100 basis points on Wednesday and pointed to matching hikes for the next two meetings, signaling a shift to a new government-named governor will not weaken its determination to battle inflation.
If the proposed roadmap is followed, the benchmark borrowing rate could soar to 14.25% as early as March – more than an eight-year high – reflecting policymakers’ determination to curb rising inflation expectations amid robust economic activity, a tight labor market and a weaker currency.
The bank’s rate-setting committee, known as Copom, unanimously increased the benchmark Selic rate to 12.25%, noting a recent government-announced package of budget measures had impacted Brazil’s real currency, asset prices and inflation expectations.
The highly-anticipated spending cut package from President Luiz Inacio Lula da Silva’s administration fell short of expectations, straining confidence in the government’s ability to manage the rising public debt.
“The committee judges that these impacts contribute to more adverse inflation dynamics,” said policymakers in the decision statement, the last under governor Roberto Campos Neto’s leadership at the central bank.
Campos Neto, who will be succeeded in January by the current monetary policy director, Gabriel Galipolo, had been emphasizing that a positive fiscal shock, such as less government spending, would have a significant impact on markets if it changed the outlook for Brazil’s public debt, as interest rate futures have surged amid growing fiscal concerns.
“Our interpretation is that the statement was quite harsh, with explicit guidance for at least another 200 basis points,” said Alexandre Espirito Santo, chief economist at Way Investimentos.
While he deemed the committee’s actions appropriate, he noted that managing expectations is an extremely challenging task at the moment, with focus shifting to the central bank’s incoming leadership in January.
Jose Francisco Goncalves, chief economist at Fator, said “the Copom’s choice for a shock approach reintroduces the additional risk of fiscal dominance, as the only guarantee for now is the increase in interest expenses.”
In so-called fiscal dominance, central bank rate hikes increase government debt servicing costs and worsen fiscal conditions, deteriorating market expectations and ultimately driving inflation higher.
Policymakers began tightening in September, stressing that the overall magnitude of the cycle would be determined by the firm commitment to reaching the 3% inflation target — a message that remained unchanged on Wednesday.
