The basic interest rate in Brazil has reached its highest level since 2017

Brazil's central bank raised the base interest rate by one percentage point Wednesday to 11.75% per year, in a bid to curb the rise in inflation, which stands at 10.54% year-on-year and threatens to soar due to the effects of the war in Ukraine.

This is the highest rate in the country in the last five years, although this time the Economic Policy Committee of the Brazilian issuer (Copom) decided to mitigate the gradual rise in the cost of money, which since October had led to increases of 1.5 percentage points.

Indeed, according to the Central Bank's estimates, after a year of hikes, rates will continue to rise to contain the rise in prices and close 2022 at 12.75% per year, but fall to 8.75% by the end of 2023, in line with its estimates for inflation.

According to the committee, the situation in Eastern Europe has increased uncertainty about the economic scenario worldwide.

“The conflict between Russia and Ukraine has led to a significant tightening of financial conditions and increased uncertainty on the global economic scene. In particular, the supply shock resulting from the conflict could exacerbate the inflationary pressures that have already built up in emerging and advanced economies,” Copom said in a statement.

According to the committee, inflation projections in 2022 are 7.1%, well above what was expected by the issuer.

For this year, the Central Bank has set an inflation target of 3.50% with a margin of tolerance of 1.5 percentage points up or down, raising the ceiling to 5%.

Brazilian inflation rose from 10.38% yoy in January to 10.54% in February, when prices rose 1.01% from the previous month, the largest increase this month since 2015.

EFFECTS OF WAR

The February results and the effects of the Russian invasion of Ukraine also left a trace of pessimism in the market.

According to the Central Bank's latest Focus bulletin, price increases will slow to 6.45% this year, which is above the inflation target for 2022, so the market, like the issuer, is forecasting a rate hike to 12.75% per year this year.

A month ago, the market estimated that the South American giant would close 2022 with 5.50% inflation and the base interest rate would end at 12.25%, but the rise in fuel and raw material prices due to the war in Ukraine could trigger inflation in Brazil and around the world.

Last week, after almost two months without adjusting fuel costs, Brazilian state-owned Petrobras raised the price of gasoline by 18.8% and the price of diesel by 24.9%.

The impact is already being felt in the pockets of millions of Brazilians who pay up to 8 reais (about 1.6 dollars) per liter of gasoline in some regions of the country.

The cost of gasoline in 2021 — which climbed more than 50 percent — was one of the factors that most impacted the country's inflation.

In Brazil, hydrocarbon prices vary depending on the international market, which is why COPOM has proposed an “alternative scenario” for inflation.

“In this scenario, which is considered more likely, the assumption is that the price of oil will roughly follow the curve of the future market until the end of 2022, ending the year at $100 per barrel and increasing by two percent per year from January 2023. In this scenario, Copom's inflation projections stand at 6.3% for 2022 and 3.1% for 2023,” he said in the note.

The Brazilian economy grew 4.6% in 2021, its largest gain in the last decade, and offset the historic fall it experienced in 2020 due to COVID-19, a result that will not be repeated in 2022, when a sharp slowdown is expected. Experts therefore estimate that the country's GDP will increase slightly by 0.49%.

(With information from EFE)

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