Brazil keeps 2pc interest rate despite rising inflation

BRASÍLIA: Brazil's central bank on Wednesday held the country's benchmark interest rate at two percent, concerned that the second wave of Covid-19 infections means the economy still may need a boost despite a rise in inflation.

The unanimous decision by the bank's monetary policy committee keeps the rate at the historically low level set in August 2020 following nine consecutive rate cuts.

"Uncertainties about the pace of economic growth remains higher than normal, especially in the first quarter of this year," the committee wrote.

It cited "the possible effects of the recent rise in the number of Covid-19 cases," in an outbreak that has killed nearly 213,000 people, the world's second-highest death toll after the United States.

The bank said it would no longer use the "Forward Guidance" mechanism, which it had used to since August to indicate its next steps in order to reassure markets and consumers about its intentions.

Analysts take this as a sign that central bank is paving the way for a future rate hike.

However the bank said in the statement that this "does not mechanically imply a rise in interest rates."

Brazil exited recession in the third quarter of 2020 with economic growth of 7.7 percent, but is still reeling from the effects of the pandemic.

The Brazilian currency, the real, depreciated sharply in 2020 against the dollar, the budget deficit widened further and unemployment reached record levels, with more than 14 million without a job.

Analysts believe inflation could reach six percent in June on an annual basis. The bank's own weekly survey, Focus, however forecasts a 3.43 percent inflation rate for the year.

President Jair Bolsonaro's government rolled out a massive emergency aid package to help poor families hit hardest by virus shutdowns, but that expired at the end of 2020.