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By Jeffrey T. Lewis and Paulo Trevisani
SÃO PAULO--Brazil's central bank raised its benchmark lending rate by a full percentage point, picking up the pace of its increases after inflation accelerated and the economy showed unexpected strength, and said it expects to increase it by the same amount at its next meeting.
The bank raised the rate, known as the Selic, to 5.25% on Wednesday from 4.25%, the fourth increase in as many policy meetings. The Selic started the year at a record low of 2%, and the bank raised it by three-quarters of a percentage point at each of the previous three meetings.
The bank's monetary policy committee, known as the Copom, said it expects to raise the Selic by another point at its next meeting and indicated more rate increases after that.
"At this moment, the Copom's baseline scenario and balance of risk indicate as appropriate a tightening cycle of the policy rate to a level above the neutral," the statement said. "For the next meeting, the Committee foresees another adjustment of the same magnitude."
Earlier this year, the central bank said it planned to raise the Selic to help control prices, but that eventually it expected to leave the rate at a level that would help boost the economy. As economic activity has rebounded faster than expected in recent months, the bank then changed its message to say it would be appropriate to raise the rate to a neutral level.
Its new message, that the rate should finish the current cycle above the neutral level, makes sense under the current circumstances, according to Rachel de Sá, chief economist at São Paulo-based brokerage Rico. Ms. de Sá said the neutral level for the Selic is around 6.5%.
"It's clear the recovery is solid, and though that doesn't mean Brazil's economy will take off in coming years, it does mean we've returned to where we were before the pandemic, so the Selic doesn't need to be stimulative," Ms. de Sá said.
The move is meant to keep price increases under control, but it risks curbing Brazil's economic growth, said André Galhardo, chief economist at Análise Econômica consulting firm in São Paulo.
"We're still recovering from this pandemic, and now the central bank will act to slow activity down," he said. "That's what 'a level above neutral' means."
Policy makers are struggling to keep inflation under control after months of pressure on food and energy prices. A bigger rate increase at this meeting was justified because policy makers need to show they are ready to take stronger measures to bring inflation down to within the bank's target range, said Roberto Secemski, an economist at Barclays in New York.
The 12-month inflation rate first moved above the 5.25% ceiling of the central bank's target range for this year in March, and reached 8.35% in June. The bank is focusing on getting the rate within the 2% to 5% target range for 2022 by the end of next year.
"They needed to pick up the pace to be consistent with their narrative," said Mr. Secemski, adding that Barclays expects inflation in Brazil to peak at around 9.1% in August, then to slow to 6.7% by the end of this year. "This is one of the last meetings the [monetary policy committee] has to try to maximize the impact of policy for its 2022 target."
The increased pressure on prices in Brazil began toward the end of last year with strong demand abroad for Brazilian agricultural exports, then continued as the price of fuels rose along with the cost of oil. Unusually dry weather in parts of the country then forced electric companies to fire up more expensive fuel-burning plants to ease the burden on Brazil's hydroelectric plants, and the companies passed their higher costs along to consumers.
As if that weren't enough, in recent weeks a cold snap in many agricultural areas has ruined many crops of fruits and vegetables, which is already pushing food prices higher and will likely have an impact for months to come.
Brazilian economists were already forecasting that the central bank will raise the Selic above that level by year-end. The median forecast in the bank's weekly survey of economists is for the Selic to end 2021 at 7%.
One concern for the central bank would be increased spending by the government. The administration of President Jair Bolsonaro is considering moves that would essentially allow it to evade a constitutional ceiling on spending increases by moving part of the budget outside the calculation of the ceiling. The government would then boost the budget of some social programs.
If that happens, "that puts more money in the economy and more pressure on prices," said Ms. de Sá.
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com
(END) Dow Jones Newswires
08-04-21 1926ET
