Brazil central bank set for another 75bps hike, ‘partial’ strategy not enough

BUENOS AIRES: Brazil's central bank will announce the third consecutive 75 basis points hike of its benchmark rate next week and possibly hint at a more aggressive cycle ahead by dropping its commitment to a "partial normalization" of policy, a Reuters poll showed.

Officials are worried about a persistent acceleration in consumer prices unanchoring inflation expectations, hitting Brazilian workers who have yet to benefit from the ongoing economic recovery from last year's coronavirus-related slump.

The bank's rate-setting committee - known as Copom - is seen hiking the Selic rate to 4.25% from 3.5% at its meeting on Wednesday, according to the unanimous view of all 37 economists who responded the June 7-10 survey.

Several analysts said May inflation figures released this week - the highest monthly rate for May in a quarter of a century and the first annual print above 8% in almost five years - will force Copom's hand.

"As inflation will be more persistent than previously thought, the central bank will have to drop partial normalization and adopt a full normalization policy," Rodrigo Abreu, an economist at Caixa Economica Federal, said.

This would open the door for extra tightening steps to bring the Selic up to 5.5% next quarter, 6.0% by year-end, and 6.5% at the start of 2022, staying at that level in the foreseeable horizon, the poll showed. Copom's official 2021 inflation target is 3.75%, with a 1.5 percentage point margin of error on either side. Inflation is expected to fall back in the second half of the year, but fewer economists now expect it to end the year below the target range's upper limit of 5.25%.

Next year's official goal is 3.50%.

"We expect the (Copom) board to abandon the 'partial normalization' reference as a way to better convey its unwavering commitment to the 2022 target," Barclays analysts wrote in a report.

Central bank chief Roberto Campos Neto on Tuesday said the bank is "100% committed" to its inflation goals.

However, the transition to a firmer monetary stance may further damage Brazil's weakened job market by tempting companies to park funds in high-yielding bank accounts rather than hire employees, as in the 2015 recession.

In the first quarter of 2021, the unemployment rate rose to a historic high of 14.7% as a record number of people out of work and other indicators pointed to general softness across the labor market.