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Barclays, Citi see 50 bps Brazil rate hike next week, raise year-end forecasts

A costumer looks for drinks at a supermarket in Rio de Janeiro

BRASILIA (Reuters) – Brazilian inflation is heading above the central bank’s target this year, forcing it to raise interest rates faster than previously anticipated, starting with a 50 basis point hike next week, economists at Barclays and Citi said on Tuesday.

In a note to clients, Barclays economists raised their year-end inflation forecast to 4.5% from 3.9%, adding that the risks remain tilted to the upside. This comes only a month after they raised the outlook from 3.6%.

The central bank’s 2021 goal is 3.75%, with a 1.5 percentage point margin of error on either side. The last official figures showed inflation running at 4.6% in January, fueled by the continued strength of food and commodity prices.

“The (Copom) would not want to run the risk of ‘falling behind the curve’ in the market’s eyes, as that could impose a larger cost to monetary policy down the line should credibility be lost in that process,” they wrote.

They now expect the central bank’s rate-setting committee, known as Copom, to raise the benchmark Selic rate next week by 50 basis points to 2.50%, and continue lifting it to 4.50% by the end of the year.

For their part, economists at Citi also expect half a percentage point rate hike next week.

But noting a persistently weak exchange rate, increasing commodity prices and rising global borrowing costs, they are penciling in another five such moves this year, taking the Selic up to 5.00%.

“Overall, our new monetary policy call contemplates six Selic rate hikes of 50bps each in 2021, driving the Selic rate to 5.0% in Oct, when Copom would opt to pause the monetary normalization process,” they wrote.

(Reporting by Jamie McGeever; Editing by Chizu Nomiyama and Andrea Ricci)

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