NEW YORK — Even with Brazil’s economy on its way to endure a substantial deceleration next year, the nation’s central bank is set to conclude 2021 with another sizable interest rate increase today.

Goldman Sachs expects the board of the monetary authority to increase its reference rate Selic by another 150bps, in line with market consensus, boosting the rate to 9.25%. “A forceful near-term monetary policy response is warranted not only because of the deterioration of the inflation outlook for 2022 and the overall balance of risks around it, but also because of the investment and growth damaging effect of lingering financial volatility amidst high fiscal- and policy-premia,” economist Alberto Ramos said in a report to investors previewing the decision.

Brazil’s central bank announced its sixth interest rate hike in October 27, and the biggest in almost two decades, raising the Selic rate by 150 basis points to 7.75%, exceeding average analysts expectations of a 100bps increase, according to data compiled by Trading Economics. 

Raising the Selic rate to 9.25% will bring it to above-neutral level, Ramos said. “Since the last Copom meeting, the Covid backdrop remained contained, real activity data was weak (both soft and hard indicators), inflation accelerated further amidst growing signs of second-round effects, 2021-23 inflation expectations moved further up, and the BRL/USD weakened slightly,” the New York-based investment bank said in the research note.

In an additional sign of economic weakness, Brazil’s retail sales edged down 0.1% m/m in October, following a downwardly revised 1.1% decline in September and missing market expectations of a 0.8% increase, Trading Economics reported today citing data from the nation’s statistics agency IBGE.

It was the third consecutive drop in retail sales, with 5 out of 8 activities recording negative growth rates, primarily in stores of books, newspapers, magazines and stationery (-1.1%); furniture and household appliances (-0.5%); fuels and lubricants (-0.3%); and in hypermarkets, supermarkets, food products, beverages and tobacco (-0.3%), Trading Economics said. On an annual basis, retail sales declined 7.1%, following a downwardly revised 5.2% drop in September and compared with market expectations of 5.6% contraction

Inflation Peak

Brazilian central bank governor, Roberto Campos Neto, said on November 26 that the bank expects inflation to peak soon and recede next year, Reuters reported. In an online event with real estate executives, Campos Neto said the central bank expected inflation to have peaked in September, but was surprised by the magnitude of energy price shocks. The nation’s inflation reached in September its highest level since February 2016, rising to an annual rate of 10.25%, but in October the cost of living rose even more to an annual rate of 10.67%.

In October, Goldman Sachs estimated that the Brazilian economy most likely will face a sizable deceleration from growing little less than 5% this year to below 1% expansion in 2022, given a backdrop of high inflation a quick shift to a significantly restrictive monetary stance by end of this year. The economy will also be affected by rising fiscal and political risk-premia “ahead of a likely highly polarized” national election in the last quarter of 2022.


More Hikes Ahead

Goldman Sachs expects additional rate increases in early 2022, and given the deterioration current and expected inflation backdrop, it sees the BCB indicating today a Selic increase of the same magnitude at the Feb 2, 2022 meeting.

However, the central bank board “may also elect to keep optionality by simply signal the intent to drive the policy rate further into restrictive territory but without explicitly signaling the magnitude of the early 2022 move given the unsettled growth and inflation dynamics and uncertain Covid backdrop,” the investment bank said.

“In all, we expect the post meeting communique to acknowledge growing signs of inflation dissemination (second-round effects), deterioration of the 2021-2022 inflation expectations, and overall worsening of the outlook for inflation, including core and services. We also expect, the balance of risks for inflation to remain asymmetric to the upside,” the bank added in the report.

Banco Central do Brazil’s monetary policy committee, Copom, announces its monetary decision at 4pm EDT.



* Updated at 11:59am EDT to add the timing of the BCB announcement in last paragraph.

Also Relevant:
* Brazil Central Bank Raises Selic Rate 150bps to 7.75%, Biggest Increase in Almost Two Decades
* Barclays Says ‘Crosswinds’ Likely to Send Latin America Back to Lower Economic Growth in 2022
* As Latin America Treads COVID’s Waters, Goldman Sachs Sees the Unwanted Return of Modest Growth and High Inflation
* Brazil’s Equity Market Looks ‘Attractively Valued’, Morgan Stanley Says. Just Not Cheap Enough to Buy The Dip Yet


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