Brazil's central bank raises interest rates continuously, economy recovers but challenges increase
2022-08-05: [Article Link] Xinhua Society, August 4th, São Paulo, Summary: The Central Bank of Brazil continues to raise interest rates, the economy warms but challenges increase.
Xinhua Agency Reporter
The Central Bank of Brazil announced on 3 March that it would increase the base rate by 50 basis points to 13.75 per cent, the twelfth consecutive increase since March 2021. The Monetary Policy Committee of the Central Bank of Brazil stated that, in order to avoid long-term inflation risk, “it is reasonable to continue to tighten monetary policy significantly to a more restrictive zone”. Since the United States Federal Reserve launched its interest-raising cycle in March of this year, the Central Bank of Brazil has increased interest rates four times in a row to prevent capital outflows from leading to depreciation of the currency and increased inflationary pressure, with cumulative increases of 300 basis points in benchmark interest rates.
The market generally expects that this increase will be the last increase in the BCB’s interest rate this year. The BCB’s latest Focus Survey predicts a benchmark rate of 13.75% for Brazil in 2022, which is the same as the previous week’s forecast.
Since this year, the Federal Government of Brazil has achieved significant results through a series of measures such as tax cuts, improved social welfare and increased fiscal subsidies to stimulate the economy and respond to high inflation. In July of this year, the annualized increase in the country's broad consumer price index, published by the Brazilian Institute of Geography and Statistics (IBGE), declined for the second consecutive month, with the ring increase having been the lowest since June 2020. In its latest edition of the World Economic Outlook Report, issued in July, the International Monetary Fund (IMF) raised Brazil's expected economic growth this year to 1.7 per cent. This is the organization's second increase in Brazil's economic growth forecast this year, with the IMF increasing Brazil's economic growth forecast this year from 0.3 per cent to 0.8 per cent in April. The financial expert of the Brazilian Vargas Foundation, Xiahua, told journalists that the latest upward revision of the IMF is expected to be based mainly on the dynamics of the Brazilian economy's internal development. In the first half of the year, the Brazilian Federal Government adopted a series of fiscal incentives to encourage spending and reduced government revenues, including increased financial support for social welfare projects, temporary measures to reduce tariffs on some imports, and increased tax subsidies. According to a recent economic monitoring report issued by the Brazilian Institute of Economic Research of the Vargas Foundation, the country’s business confidence index, the service sector confidence index, and the consumer confidence index increased by the end of June this year. In July, the service sector confidence index rose to its highest level since September 2013.
According to the economist Rodolfo Tobler of the Institute, domestic demand is now warming in Brazil, the overall service sector is in a better position, and the recent stimulus measures taken by the Brazilian Government are expected to make the services sector perform better than expected in the third quarter.
With regard to exports, the latest report issued by the External Trade Bureau of the Ministry of Economy of Brazil shows that between January and July of this year, Brazil's accumulated exports amounted to $194.79 billion, a 20 per cent increase over the same period.
However, Xiahua said that Brazil’s economy still faced a number of challenges in the second half of the year. Internal challenges included, inter alia, high inflationary pressures, high interest rates, and uncertainty in the presidential election year. In the external environment, the negative spillover effects of the Fed's sustained interest increases, as well as the risks of slowing world economic growth as a result of the energy crisis, rising food prices and the threat to global supply chains of the new Covid-19 virus, cannot be ignored. Moreover, many of Brazil’s stimulus measures will end by the end of 2022, when tax rates are likely to return to high levels. High inflation, insufficient capacity for private investment in a high-interest-rate environment, low profitability of important commodities, and uncertain prospects for consumption will constrain the country’s future economic growth.