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The Central Bank of Brazil raises its rate to 3.5% and warns that there will be other hikes

The Central Bank of Brazil (BCB) raised its base rate again on Wednesday by 0.75 percentage points, to 3.5%, and indicated that it plans to do the same in June to contain inflation, on the rise despite the economic slowdown caused by the pandemic.

The decision, adopted unanimously by the nine members of the Monetary Policy Committee (Copom) of the BCB, coincides with what was expected by analysts.

The BCB raised its Selic rate in March for the first time in six years, from its historical low of 2% to 2.75%, and indicated that it was opening a cycle of “partial normalization” to prevent inflation, which was rising sharply in the last few months, it got out of control.

In its statement on Wednesday, the Copom indicated that “it foresees the continuation of the process of partial normalization of the monetary stimulus, with another adjustment of the same magnitude” at its next meeting on June 15 and 16.

And he warned of a greater tightening of the monetary policy pegs, given that “its next steps may be adjusted to ensure compliance with the inflation target.”

The inflationary target of the BCB for 2021 is 3.75% with a tolerance margin that can reach 5.25%. But the price increase accumulated in twelve months reached 6.10% in March.

The inflation forecast for this year thus went from 3.34% in January to 5.04%, according to the weekly Focus survey of market expectations carried out by the BCB.

The market also expects Selic to reach 5.50% by the end of the year and 6.25% in 2022.

The BCB admits that “the economic recovery process may be slower than expected” due to the pandemic, which has already left almost 415,000 dead in Brazil, and that this could mitigate the upward trend in prices.

At the same time, it warns that the expenditures linked to the government’s response to the pandemic and the “frustrations about the continuity of the reforms” in the pro-market could drive up country risk, which would push inflation upward.

This “high fiscal risk” continues to predominate in the BCB’s consideration, above other bearish factors.

Brazil’s GDP contracted 4.1% in 2020 and the markets forecast it to grow 3.14% this year, a number that has been revised several times downwards due to the intensification of the coronavirus pandemic, which in April registered its highest monthly death toll.

Confirmation of this slowdown was again seen in the 2.4% drop in industrial production in March compared to February, while unemployment rose again in the last two months, cutting a streak of four monthly improvements, to reach a record number of 14.4 million people looking for work.

For the Federation of Industries of the State of Sao Paulo (Fiesp), the rise in rates “may intensify the negative impacts of the closure of economic activities and harm the recovery of employment in recent months.”

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