To contain inflation, the Central Bank of Brazil approved the largest increase in the benchmark rate since 2002

Illustrative file photo of the Central Bank of Brazil building in Brasilia (Photo: REUTERS / Ueslei Marcelino)

The Central Bank of Brazil raised the benchmark interest rate on Wednesday to 7,75%, a hike of 1.5 percentage points, the largest in almost two decades, to try to contain inflation, reported the monetary authority.

The increase in the Selic rate is the sixth consecutive in the year, and is in line with market expectations, given the accelerated rise in prices and the prospect of an increase in public spending due to a government aid program.

The decision communicated at the end of a meeting of the Monetary Policy Committee (Copom) deepens the hike strategy implemented so far, and provides the biggest jump in the rate since December 2002.

The committee “considers that, given the deterioration in the balance of risks and the increase in its projections, this rate of adjustment is the most appropriate to ensure the convergence of inflation to the goals “said in a statement.

For the next meeting in December, he added, he foresees “another adjustment of the same magnitude”, with which he would bring the rate up to 9.25%.

The last time the interest rate was above 7.75% was in 2017.

The Selic stood at 6.25% since last September, when the committee implemented a one percentage point hike, as in the previous month, when it accelerated the climb that began in March.

Then, the Copom moved the rate for the first time after holding it at a historical low of 2% for a semester, to boost the economy hit by the pandemic.

The president of Brazil, Jair Bolsonaro, in a file photograph (EFE / Joédson Alves)

Now, Rising inflation, fueled even more by the expected increase in public spending, forced a rise greater than the one percentage point predicted by the Copom in its previous meeting.

The consumer price index accumulated a 10.25% increase in the 12 months to September, exceeding double digits for the first time in more than five years. And the forecasts for October indicate no improvement.

In the Central Bank’s Focus survey, inflation projected for this year reached 8.96%, and the estimate for 2022 also rose to 4.40%, above the official goal of 3.5%.

Spending on the rise

Concerns in the fiscal scenario soared in recent days after President Jair Bolsonaro’s announcement that he will increase social assistance for almost 17 million vulnerable Brazilians until the end of 2022.

The Brazilian population suffers the impact of price increases, especially food. And unemployment still reaches 13.7 million people, despite falling to 13.2% in the June-August quarter, the lowest level in a year.

The initiative of the president, on the eve of an electoral year, foresees a maneuver not to exceed a limit for the use of public resources set by law and must be approved in Congress.

File photo: Consumers buy basic food in a popular market in the city of São Paulo (EFE / Sebastiao Moreira)

But the possible perforation of the spending ceiling caused unrest in the market and a deterioration in economic expectations going forward.

Concerns about the fiscal situation, specialists warn, translate into a greater perception of risk in the economy, which weakens the real and, therefore, worsens the inflation outlook.

For 2022, forecasts such as that of the Itaú bank warn of a 0.5% contraction of GDP, as a result of high rates.

With information from AFP

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