Brazil Central Bank Raises Selic Rate to 6.25%, Sees Increase to 7.25% in October -- Update

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By Jeffrey T. Lewis and Paulo Trevisani

SÃO PAULO--Brazil's central bank raised its benchmark lending rate by one percentage point as consumer prices continue to rise rapidly, and said it expects to increase it by the same amount at its next meeting in October.

The central bank's monetary policy committee on Wednesday raised the Selic, as the key rate is known, to 6.25% from 5.25%, as expected. It was the second consecutive increase of that size, following increases of 75 basis points at each of the previous three meetings. The Selic began 2021 at a record low of 2%.

Another rate increase of one percentage point would be appropriate to ensure the inflation rate will fall to the central bank's target, it said in its statement. The central bank will monitor the economic situation and update its policy if necessary, it added.

The central bank's monetary policy committee "emphasizes that its future policy steps could be adjusted to ensure the achievement of the inflation target and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy," the statement said.

Brazil's 12-month inflation rate reached a five-year high of 9.68% in August, higher than expected, as a steep currency depreciation and a drought in many parts of the country pushed prices higher. Shortly after the August inflation figures were released, several economists said they expected the bank to raise the Selic by more than a point at Wednesday's meeting.

Central Bank President Roberto Campos Neto last week damped those expectations, saying that the central bank will do what it takes to bring inflation back down, but that it wouldn't necessarily change course because of individual indicators. Wednesday's statement reinforced that message, according to Camila Abdelmalack, chief economist at Veedha Investimentos in São Paulo.

"The central bank cooled down expectations of higher increases," said Ms. Abdelmalack, who foresees another similar hike in each of this year's remaining two meetings to end the year with the Selic at 8.25%. "The statement wasn't so heavy, we don't see a major change relative to the previous one even though inflation has worsened."

The drought and the weaker real aren't the bank's only concerns regarding pressure on prices. The government has also increased spending to fend off the impact of economic restrictions imposed to fight Covid-19, which has killed nearly 600,000 Brazilians.

The central bank has pointed to the fiscal stimulus as something that could push inflation beyond its target.

Economists say higher government spending bumps up demand, pressuring prices.

Brazilian power companies have had to fire up more expensive fuel-burning plants, and passed the higher cost along to consumers, after reservoirs behind the country's many hydroelectric plants have fallen to low levels. The drought has also hurt crops and pushed food prices higher.

Brazilian farmers and power companies are counting on more rain through the end of this year, and in mid-September precipitation increased in some areas, but it is still too early to say if there will be enough improvement to help.

"There's a lot of uncertainty, more than anything else about energy," said Mauricio Nakahodo, senior economist at Banco MUFG Brasil. "That could impact the economy next year, and some see the possibility of some power rationing if the rain doesn't come back. That could have an impact on economic growth next year."

The Brazilian real could also add to price pressures in coming months. Brazilian President Jair Bolsonaro's approval ratings are weak, and the chances of his government getting a long-awaited tax overhaul approved are looking slim. There is also concern that Congress might pass spending measures that would increase the budget deficit and heighten concern about fiscal stability.

Both of those situations could undermine investor confidence in Brazil and weaken the real against the dollar. Brazil's currency has lost about 15% of its value against the dollar since the start of the pandemic in February 2020, making imports more expensive.

That change, along with the jump in the price of oil on world markets, has sent the price of fuels soaring this year. The cost of gasoline is up 31% since the start of 2021, and the price of diesel fuel is up 28% in the same time, according to Brazil's statistics agency.

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com


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  09-22-21 1853ET
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