Brazil hikes key interest rate to double digits

[BRASÍLIA] Brazil's central bank hiked its benchmark interest rate by 1.5 points on Wednesday to 10.75 per cent, bringing it into double digits for the first time in nearly five years to fight rampant inflation.

The eighth straight increase to the Selic rate, which was in line with forecasts, comes as Latin America's biggest economy struggles through a recession and stubbornly high inflation that the bank's monetary policy committee said "continued to be a negative surprise."

The nine-member committee, which made the decision unanimously, hinted it would soon slow the tightening cycle, saying it "currently foresees a slowdown in the pace (of rate cuts) as the most adequate policy."

Brazil has responded to pandemic-driven inflation with one of the most aggressive tightening cycles in the world, rapidly raising the key interest rate from an all-time low of two per cent in March 2021.

The last time the Selic rate was in the double digits was in May 2017.

Brazil's inflation rate came in at 10.06 per cent for 2021, crashing through policymakers' target range - currently 3.5 per cent, plus or minus 1.5 percentage points.

But the hawkish monetary policy is putting the brakes on economic growth.

The economy fell into recession last year, contracting 0.4 per cent in the second quarter and 0.1 per cent in the third.

Analysts polled by the central bank are currently forecasting economic growth of a lackluster 0.3 per cent for this year.

ELECTION YEAR

The weak economy has emerged as a major headache for far-right President Jair Bolsonaro, who is up for reelection in October and badly trailing his nemesis, leftist ex-president Luiz Inacio Lula da Silva, in the polls.

Election-year and pandemic-related uncertainties loom large for Brazil's economy, but there are tentative signs of improvement.

The monthly inflation rate slowed at the end of the year, from 0.95 per cent in November to 0.73 per cent in December.

And industrial production came in at a stronger-than-expected 3.9 per cent for 2021, according to figures released Wednesday - though it remains 0.9 per cent below its pre-pandemic level.

Central bank chief Roberto Campos Neto recently said he expected the rate-tightening cycle was "reaching its end."

The bank's next meeting is set for mid-March. Many analysts forecast the last rate hike will come in May, bringing the Selic to around 12 per cent. AFP