BCB To Hike Once More In June, With Risks To The Upside

• On May 4, policymakers at the Banco Central do Brasil (BCB) announced an increase in the benchmark Selic interest rate to 12.75%, from 11.75% previously. This was in line with Fitch Solutions’ view and consensus expectations that brought total hikes in the BCB’s current cycle to 1,075 basis points (bps) since March 2021, one of the most aggressive tightening cycles globally. 
• The BCB stated that it ‘foresees as likely an extension of the cycle, with an adjustment of lower magnitude’. This aligns with the Agency’s view that the bank will make one additional 50bps rate hike this year, in a shift from the central bank’s previous position that it would end its tightening cycle with the May meeting. 
• Notably, this view is underpinned by persistent, broad-based inflationary pressures, which have been exacerbated by higher commodity prices after the Russian invasion of Ukraine and a slight recent weakness in the currency. In March 2022, inflation accelerated above consensus expectations to 11.3% y-o-y (1.6% m-o-m), the highest level since 2003, driven higher by food and fuel prices alongside strong core inflation. 
• Overall, it is expected the BCB will hike by an additional 50bps at its next meeting on June 15, bringing the rate to 13.25%, which is in line with Bloomberg consensus expectations of 13.30%., then hold through the rest of 2022. That said, risks are poised to the upside, with the bank leaving the door open to extending its rate hiking cycle further if inflation continues to surprise to the upside, inflation expectations trend higher or if the Brazilian real were to significantly weaken.

(Source: Fitch Solutions)