Central Bank raises benchmark interest to 3.5% a year

Amid hikes in food, fuel, and energy prices, Brazil’s Central Bank raised the country’s benchmark interest rate by 0.75 percentage points for the second time in a row. The Monetary Policy Committee (Copom) increased the Selic rate to 2.75 to 3.5 percent a year this Wednesday (May 5).

In a statement, the Central Bank declared it should elevate the Selic rate by 0.75 percentage points at the next Copom meeting, on June 15 and 16.

Inflation

The benchmark interest rate is used in negotiations of public bonds within the Special Clearance and Escrow System (Selic) and serves as parameter for other interest rates in the economy. It is also the Central Bank’s main tool to curb the country’s official inflation, as gauged by the National Broad Consumer Price Index (IPCA). The indicator closed out March with the highest level for the month since 2015, with a 12-month accumulated rate of 6.1 percent, pressed by the dollar and the hike in fuel and LPG prices.

The amount is above the inflation’s target ceiling. For 2021, the National Monetary Council (CMN) had set the target of the inflation at 3.75 percent, with a 1.5 percentage point margin. The IPCA, however, must not go beyond 5.25 percent this year or sink below 2.25 percent.

In the Report on Inflation, released by the Central Bank at the end of March, the monetary authority estimates that, in 2021, the IPCA would close out the year at five percent in the base scenario, where the ceiling of the inflation target is surpassed in the first half-year, followed by a reduction in rates in the second half of the year.

The forecast is in line with market estimates. According to the Focus readout, a weekly survey with financial institutions made public by the Central Bank, the official inflation is likely to reach the end of the year at 5.04 percent. The official projection will be updated in the next Report on Inflation, late in June.