Central Bank signals high interests will remain for longer than expected

After raising Brazil’s benchmark interests for this year by half a percentage point to 13.25 percent a week ago, the Central Bank on Tuesday said that the Selic rate will remain in significantly higher territory for longer than initially forecast.

“Thus, the strategy of convergence around the target requires a more contractionary interest rate than that used in the reference scenario for the entire relevant horizon,” the bank’s Monetary Policy Committee wrote.

In March of last year, the Brazilian Central Bank initiated what has been the world’s steepest monetary tightening process, taking interests from 2 percent, an all-time low, to the current 13.25 percent in a matter of 14 months.

Still, the bank says a high interest rate alone won’t be able to force inflation down from the current 11.73-percent level to the government’s 2-to-5-percent target band for this year or the next. The committee stressed that “uncertainty about the future of the country’s fiscal framework and fiscal policies that support aggregate demand may bring an upside risk to the inflationary scenario and to inflation expectations.”

The government has been disrespecting fiscal austerity rules since last year, when it got Congress to greenlight a postponement of court-ordered repayments. Now, the government is flirting with moves to lower fuel prices that could further disrupt the health of the public purse — especially for state administrations.

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