Brazil readies another sharp rate hike, with inflation at 4-year high

BRASILIA: Brazil's central bank will deliver another sharp interest rate increase on May 5, according to the unanimous view of a Reuters poll of economists, as it battles to cool price pressures this year and stop 2022 inflation expectations from rising.

Inflation in Latin America's largest economy, driven by food and fuel prices, is already well above the central bank's year-end target of 3.75% and risks breaching the 5.25% upper end of policymakers' range at the end of 2021.

Central bank chief Roberto Campos Neto has said another 75 basis point increase in the benchmark Selic rate, the same size of move that kicked off the tightening cycle in March, is highly likely unless something "extraordinary" happens.

Economists agree. All 29 respondents in the April 28-29 poll said the bank's rate-setting committee, known as Copom, would lift the Selic to 3.50% from 2.75% at its May 4-5 meeting.

Even though the economy is losing steam due to a deadly second wave of the COVID-19 pandemic and could even slip into recession, more inflation-busting rate hikes are coming.

"Depending on the fiscal developments and the increases in 2022 inflation expectations (3.6% at this point, above the mid-point target of 3.5%), we warn that risks are biased toward a higher Selic rate," Citi economists wrote in a note.

Inflation topped 6% in March for the first time in more than four years and is likely to rise further in the coming months before easing. Some economists say it could peak above 7%.

Campos Neto and colleagues have repeatedly said aggressive rate hikes early in the tightening cycle will mean borrowing costs will ultimately not have to go that high. They have called this a "partial normalization" process.

But against a backdrop of punchy price pressures, fiscal risks and a weak currency, the rate outlook is drifting higher.

The central bank's latest weekly 'FOCUS' survey of economists put the median year-end Selic forecast at 5.50%, up from 5.00% a month ago, and the rate forecast is starting to drift above 6% for next year.