The war in Ukraine also has consequences for Latin America. In an attempt to curb inflation, Brazil’s central bank raised its key rate by one point on Wednesday. At 12.75%, it reached its highest level in five years. This is the tenth consecutive increase since March 2021, when the key rate was at its historic low of 2%.
The decision was taken unanimously by the Monetary Policy Committee of the Brazilian Central Bank (Copom), which has been meeting since Tuesday. A key rate of 12.75% is unheard of since February 2017, when it reached 13%. It is in line with analysts’ expectations.
“Deterioration of the international context”
The Copom cited the “deterioration of the international context”, the inflationary effects of the war in Ukraine, as well as the difficulties currently posed by Covid-19 to China, to justify its decision. “The tightening of monetary policies in advanced countries increases uncertainty and volatility, especially for emerging countries,” the Copom said.
At its previous meeting, in mid-March, the Copom had already raised its key rate by one point, to 11.75%, after three successive increases of 1.5 points. The Copom had also announced that it was considering an increase in May “of the same magnitude” as that of March. On Wednesday, it hinted that, at its next meeting in June, it would raise the key interest rate again, but “on a smaller scale”.
In recent weeks, inflation has worsened further in Brazil, rising to 11.3% in March, the highest since October 2003, according to official data released in April. The rise in prices, already significant since last year, intensified with the war in Ukraine, which has, as elsewhere, a strong impact on the cost of fuel and food.
Analysts consulted for the central bank’s weekly Focus survey raised their forecast for inflation in 2022 to 7.9%, from 7% a month ago. The rise in rates risks slowing down the economic recovery: growth forecasts for Latin America’s largest economy in 2022 are weak, at +0.7%, according to the latest Focus survey.
On the foreign exchange market, the increase in the key rate nevertheless enabled the real to regain value against the dollar during the first months of the year. The greenback traded at 4.61 reais in January, after an average rate of 5.39 reais in 2021. But the Brazilian currency has fallen again in recent weeks, returning to around 5 reais to the dollar.