Brazil’s central bank raised interest rates by the most since 2003

Spark Global Limited reports:

Brazil’s central bank has raised interest rates by its biggest margin since 2003 and promised another 100 basis points at its September meeting as a reinvigorated economy and a severe drought fuelled expectations that inflation would remain above target next year.

The Central bank’s decision on Wednesday to raise the Selic rate by one percentage point to 5.25 percent was in line with the expectations of 39 of 41 analysts surveyed by Bloomberg. Two other economists forecast a fourth consecutive rate increase of 75 basis points. Brazil’s central bank wrote in its policy statement:

“At its next meeting, the Committee expects to make adjustments of the same magnitude. Future policy steps may be adjusted to ensure that the inflation target is met.”

Brazil’s Central bank has one of the most aggressive monetary policies in the world, raising interest rates by 325 basis points since March. But as local governments lift remaining quarantine restrictions, price pressures are building, forcing the central bank to work harder to get inflation to its target next year.

Alejandro Cuadrado, Latin America strategist at Banco Bilbao Vizcaya Argentaria SA, said before the rate decision.

“In Brazil, the drivers of inflation include food prices and the impact of a climate crisis like drought. Brazil is the only country in the region that has been really aggressive [with interest rate policy].”

Analysts say the dollar overshoot has spread around the world and emerging markets are biting their teeth. Between raising interest rates and not raising them, the world economy is on ice and fire.

On July 23rd Russia’s central bank duly raised its benchmark interest rate by 100 basis points to 6.5%. It’s worth noting that the rate increase is also the largest since the rouble crisis in 2014.

After the latest rate increase, the Central bank has raised rates four times this year by 225 basis points. The reason for those four increases was the same: to stop domestic inflation from rising. According to official statistics, annualised inflation rose from 6 per cent in May to 6.5 per cent in June, higher than regulators’ expectations and close to its peak over the past five years.

On July 14, Chile’s central bank unanimously approved a quarter-point rate increase to 0.75%, the country’s first since January 2019. Chile’s central bank expects the economy to grow by 9.5% this year and inflation to exceed its policy target of 2% to 4%.

On June 24th Mexico’s central bank unexpectedly raised its benchmark interest rate by a quarter of a percentage point, to 4.25%, in response to what policymakers had called a “temporary” surge in inflation.

On June 16, Brazil’s central bank raised its benchmark lending rate by 75 basis points to 4.25%. It was the third rate rise in a row since March in an effort to dampen rising inflation expectations.

The Czech central bank should raise interest rates again at its policy meeting on August 5 and may continue to tighten monetary policy after that, according to the governor of the central bank.

However, developed countries, such as the US, Europe and Japan, are still holding extremely loose policies, which has stimulated the sharp rise in the prices of commodities and agricultural products in the international market since April last year. Coupled with the frequent global extreme weather events this year, emerging markets are under great imported inflationary pressure.

The International Monetary Fund said in early July that if the US provided more fiscal support, it could add further to global inflationary pressures. But on July 29th the Federal Reserve’s decision on interest rates suggested that it would remain on hold. As Fed Chairman Jeroen Powell stressed, rate hikes are still a long way off, and he thinks inflation will move higher in the coming months.

The US is the world’s largest economy and the US dollar is the world’s largest liquid currency. A sustained rise in INFLATION in the US is bound to transmit to the global market. In a report in early July, the IMF said other countries faced continued pressure from rising commodity and food prices, with global food prices in particular now at their highest levels since 2014, putting millions of people at risk of food insecurity.

Given the way in which the dollar flows into the market, driving up global commodity and agricultural prices, the more accommodative U.S. policy is, the more inflationary pressure the world faces, especially in emerging markets and developing countries, where imported inflation is lifting all boats. In addition to the divergence in COVID-19 vaccination rates, inflation is a big factor in the apparent economic divergence between developed and developing economies.

In its latest report on July 27, the IMF cut its growth forecast for emerging market and developing economies by 0.4 percentage points this year to 6.3%. The IMF said emerging market and developing economies are facing the dual impact of a worsening outbreak and tighter external financial conditions, which could hit their recovery hard and drag down global growth.

Meanwhile, the IMF raised its growth forecast for advanced economies this year by half a percentage point to 5.6 per cent, with significant upgrades for the US, UK, Canada and Italy and unchanged for France and Germany.

The increasingly serious economic differentiation between developed and developing regions will inevitably lead to the aggravation of the contradictions between different regions. This, in turn, has further widened the economic gap between developed and developing countries in the post-pandemic era. From historical experience, every major human crisis has accelerated the widening of the gap between rich and poor, and the global COVID-19 crisis is no exception.