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Brazil’s central bank is expected to increase the pace of tightening

Brazil’s central bank is expected to hike its key rate for the sixth straight this year on Wednesday, and many economists predict the pace of rate hikes will accelerate amid double-digit inflation.

Latin America’s most populous nation is experiencing some of the sharpest price increases among major economies, driven by factors such as higher fuel costs, a weaker exchange rate, and a drought that has driven energy costs up.

With inflation returning amid the coronavirus recovery, Banco Central do Brasil has taken a restrictive stance, raising the reference rate for Selic from an all-time low of 2 percent to the current level of 6.25 percent since March. Its monetary policy committee  -proved increases of 100 basis points in its last two meetings.

But pressure is mounting to press ahead with Wednesday night’s decision as investors fear Brasília will bypass a constitutional ceiling on government spending, which is considered a pillar of the country’s economic credibility.

President Jair Bolsonaro’s push for expanded welfare benefits for the poorest ahead of next year’s elections has shocked financial markets. The country’s stock index and exchange rate fell last week, and there are concerns that new social spending could further fuel inflation.

Alberto Ramos, an economist at Goldman Sachs, said a potential 150 basis point increase that would bring the Selic to 7.75 percent is now “normal”.

“A brave short-term monetary policy reaction is not only because of the deterioration in the inflation outlook for 2022 and the associated overall risk balance, but also because of the. . . detrimental effect of ongoing financial volatility, ”he wrote in a message to his customers.

BCB President Roberto Campos Neto will weigh these risks against the potentially dampening effects of higher interest rates on economic activity.

After far-reaching downgrades of economic growth forecasts for 2022, Brazil’s largest bank Itaú forecast this week that gross domestic product will shrink by 0.5 percent in the next year.

Brazil’s consumer prices rose by 10.3 percent in the twelve months to the beginning of October, more than expected by analysts and well above the annual target of 3.75 percent for 2021. According to data, only Argentina and Turkey have higher inflation rates among the G20 countries OECD data.

“It is very difficult to say that after that [currency] The devaluation we saw last week and we expect it to continue in the near future, ”said Solange Srour, Credit Suisse Chief Economist in Brazil.

Brazil’s lower house of Congress is due to vote Wednesday on a bill that would raise the so-called budget ceiling and delay the payment of certain court-ordered national debts, potentially freeing up an additional R $ 80 billion (US $ 14 billion) for next year’s budget.

Additional coverage from Carolina Pulice in São Paulo

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