Volkswacht Bodensee - Brazil hikes key interest rate to double digits

The eighth straight increase to the Selic rate, which was in line with forecasts, comes as Latin America's biggest economy struggles through a recession and stubbornly high inflation that the bank's monetary policy committee said "continued to be a negative surprise."

The nine-member committee, which made the decision unanimously, hinted it would soon slow the tightening cycle, saying it "currently foresees a slowdown in the pace (of rate cuts) as the most adequate policy."

Brazil has responded to pandemic-driven inflation with one of the most aggressive tightening cycles in the world, rapidly raising the key interest rate from an all-time low of two percent in March 2021.

The last time the Selic rate was in the double digits was in May 2017.

Brazil's inflation rate came in at 10.06 percent for 2021, crashing through policymakers' target range -- currently 3.5 percent, plus or minus 1.5 percentage points.

But the hawkish monetary policy is putting the brakes on economic growth.

The economy fell into recession last year, contracting 0.4 percent in the second quarter and 0.1 percent in the third.

Analysts polled by the central bank are currently forecasting economic growth of a lackluster 0.3 percent for this year.

- Election year -

The weak economy has emerged as a major headache for far-right President Jair Bolsonaro, who is up for reelection in October and badly trails his nemesis, leftist ex-president Luiz Inacio Lula da Silva, in the polls.

Election-year and pandemic-related uncertainties loom large for Brazil's economy, but there are tentative signs of improvement.

The monthly inflation rate slowed at the end of the year, from 0.95 percent in November to 0.73 percent in December.

And industrial production came in at a stronger-than-expected 3.9 percent growth for 2021, according to figures released Wednesday -- though it remains 0.9 percent below its pre-pandemic level.

Central bank chief Roberto Campos Neto recently said he expected the rate-tightening cycle was "reaching its end."

The bank's next meeting is set for mid-March. Many analysts forecast the last rate hike will come in May, bringing the Selic to around 12 percent.

J.Horn--BTB