Brazil’s rates hike likely as inflation continues upward trend – analysts

SAO PAULO (ICIS)–Brazil’s central bank is likely to increase interest rates this week as the annual inflation rate continued ticking up in November to nearly 5%, analysts said on Tuesday.

Some analysts think rising prices and a healthy economy lay the ground for Brazil’s central bank to hike rates this week by as much as three quarters of a point to 12.0%.

Brazil’s annual rate in the price consumer index (IPCA in its Portuguese acronym) stood November at 4.87%, up from 4.76% in October, according to the country’s statistics office IBGE on Tuesday.

Monthly inflation, however, eased with the IPCA up 0.39% in November, month on month. In October, monthly price rises stood at 0.56%.

Prices continued reeling in November from the severe drought that affected much of Brazil in August-October. In November, the drought’s lingering effects showed in food prices, with a monthly price increase of 1.55%.

In October, the drought effects had showed in the electricity bills due to lower hydroelectric energy production during that month.

UP AND UP
November’s uptick in inflation is likely to prompt the Banco Central do Brasil (BCB) monetary policy committee, called Copom, to hike the main interest rate benchmark, the Selic, for the third time since August as they meet for the last time in 2024 on Wednesday (13 December).

Far from continuing the monetary policy easing being implemented in most major economies, Copom members went the other way in August as inflation started increasing, bucking the trend in the rest of Latin America. The Selic was hiked to 11.25% at Copom’s November meeting.

A depreciating real – making dollar-denominated imports more expensive, and a healthy economy – pushing up consumption – are propping up inflation. Investors’ concerns about the government’s fiscal policy have further depreciated the real, in turns feeding back into inflation.

“The further rise in Brazil’s inflation rate in November alongside the weakness in the real and strong economic growth mean that Copom is nailed on to step up the pace of monetary tightening, probably with a 75bps [basis points] hike to 12.00% tomorrow,” said Capital Economics.

“Further tightening is on the cards in early 2025 and the risks to our Selic forecast are skewed to the upside, particularly if the government fails to better address investors’ fears about the state of the public finances … Our current forecast is for a peak in the Selic of 13.00% [in 2025] but the risks are firmly skewed towards rates being raised even higher.”

BRAZIL ANNUAL RATE OF INFLATION
Change in %
Grey columns: forecast
Source: IBGE via Trading Economics

BRAZIL INTEREST RATES
Change in %
Source: BCB via Trading Economics