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ECONOMY | 04-05-2022 21:13

Reacting to Fed hike, Brazil raises key interest rate 10th straight time

Brazil's Central Bank raises key interest rate for the 10th straight time, trying to tame surging inflation that has proved tough to slow for policy makers.

Brazil's central bank raised its key interest rate for the 10th straight time Wednesday, trying to tame surging inflation that has proved tough to slow for policy makers in Latin America's biggest economy.

Saying inflation "continued surprising negatively," the bank's monetary policy committee raised the benchmark Selic rate one percentage point, to 12.75 percent, in line with analysts' forecasts.

Conditions in the global economy have "continued to deteriorate," the bank said in its accompanying statement.

"Inflationary pressure stemming from the [coronavirus] pandemic has intensified, with supply problems caused by the new wave of Covid-19 in China and the war in Ukraine."

Monetary tightening by the world's wealthiest countries is also "increasing uncertainty and creating additional volatility, particularly for emerging countries," it said.

The move came the same day the US Federal Reserve raised its key interest rate by a half percentage point – its biggest hike since 2000 – and indicated more tightening was on the way, also trying to slow soaring inflation.

In Brazil, the unanimous decision by the committee's nine members brought the Selic to its highest since February 2017, when it stood at 13 percent.

The bank said it expected another rate hike "of smaller magnitude" at its next meeting, from June 14 to 15.

 

'Extra caution'

Brazil is on one of the most hawkish interest-rate tightening cycles in the world, struggling to reign in spiralling prices driven upward first by the impact of the coronavirus pandemic and then the Ukraine war.

Brazil's annual inflation rate stands at 11.3 percent, far above the central bank's target of 3.5 percent.

The mid-month inflation indicator for last month suggests the problem is getting worse: it came in at a 27-year high for April.

Rising prices and the sluggish economy in general are weak spots for far-right President Jair Bolsonaro, who is up for re-election in October and currently trails leftist ex-president Luiz Inácio Lula da Silva in the polls.

The central bank faces a difficult balancing act, tasked with slowing inflation without slamming the brakes on the economy so hard it stunts growth.

Analysts polled by the bank currently forecast the economy will grow a lacklustre 0.7 percent this year.

But the bank still appeared more worried by inflation than low growth, saying indicators of economic activity were "in line with the committee's expectations."

However, it warned the situation was particularly volatile and unpredictable.

"The committee notes that the high level of uncertainty in the current outlook, as well as the advanced stage of the tightening cycle and its still-pending impacts, require extra caution," it said.

Brazil's central bank started its current tightening cycle in March 2021, rapidly raising the Selic from an all-time low of two percent introduced to stimulate the pandemic-battered economy.

 

– TIMES/AFP

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