Brazilian real weakens after biggest rate hike in a decade

Brazil central bank president Roberto Campos Neto in Brasilia, Brazil, February 24 2021. Picture: UESLEI MARCELINO/REUTERS

Investors considered 150 basis points as the bare minimum policymakers had to deliver amid a deterioration in Brazil’s fiscal outlook. Some expected the bank to send a stronger message in order to keep inflation expectations under control. “Recent questioning regarding the fiscal framework increased the risk of de-anchoring inflation expectations,” they wrote. “This implies a higher probability of inflation paths above the one projected under the baseline scenario.”

In the statement, policymakers wrote the pace of consumer price increases remains high and that there’s additional pressure on core inflation. In such a scenario, it’s appropriate to implement an even more restrictive monetary policy, they added. The rate hike is likely to have an affect in sectors that greatly benefited from a recent period of low borrowing costs, including real estate and the equity market, on top of boosting Brazil’s debt service burden. It’s also likely to slow down activity further at a time some economists warn about the growing risk of recession next year.

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