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

Brazil's central bank raised the basic interest rate by one percentage point on Wednesday to 11.75% per year, in an attempt to curb rising inflation, which stands at 10.54% year-on-year and threatens to skyrocket further 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 soften the gradual rise in the cost of money, which since October had been driving increases of 1.5 percentage points.

This is because according to estimates by the Central Bank, after a year of increases, rates will continue to rise to contain the price increase and will close 2022 at 12.75% a year, but will fall to 8.75% by the end of 2023, in accordance with the estimates it estimates for inflation.

According to the committee, the situation in eastern Europe increased uncertainty about the economic scenario around the globe.

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

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

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

Brazil's inflation rose from 10.38% year-on-year in January to 10.54% in February, when prices rose 1.01% compared to the immediately previous month, the highest increase for this month since 2015.

EFFECTS OF WAR

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

According to the latest Focus bulletin by the Central Bank, price increases will slow to 6.45% this year, above the inflation target for 2022, so the market, like the issuer, forecasts a rise in rates to 12.75% annually this year.

A month ago, the market estimated that the South American giant would close 2022 with inflation of 5.50% and that the basic interest rate would end at 12.25%, but the increase in fuel and commodity prices due to the war in Ukraine could trigger inflation in Brazil and around the globe.

Last week, after almost two months without readjusting fuel costs, Brazil's state-owned Petrobras increased the price of gasoline by 18.8% and the price of diesel by 24.9%.

The impact is already felt in the pockets of millions of Brazilians who are paying up to more than 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% - was one of the factors that most impacted the country's inflation.

In Brazil, hydrocarbon prices vary depending on the international market, and that is why Copom proposed an “alternative scenario” for inflation.

“In this scenario, considered more likely, the assumption is that the price of oil roughly follows the curve of the future market until the end of 2022, ending the year at $100 per barrel and increasing by two percent a 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.

Brazil's economy grew by 4.6% in 2021, its highest rise in the last decade, and offset the historic fall it suffered in 2020 due to COVID-19, a result that will not be repeated in 2022, when a sharp slowdown is expected, so experts estimate that the country's GDP will advance by a slight 0.49%.

(With information from EFE)

Keep reading: