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Brazil front-loading rate hikes means tightening cycle may not be so intense - central bank chief - Metro US

Brazil front-loading rate hikes means tightening cycle may not be so intense – central bank chief

FILE PHOTO: Brazil's Central Bank President Roberto Campos Neto attends a news conference, amid the coronavirus disease (COVID-19) outbreak, in Brasilia

BRASILIA (Reuters) – Brazil’s central bank president Roberto Campos Neto said on Thursday that a faster pace of interest rate hikes at the start of the policy tightening cycle means the overall adjustment may not have to be so aggressive.

In an online news conference following the release of the bank’s quarterly inflation report, Campos Neto emphasized that the move away from record low borrowing costs is a “partial normalization” of policy related to the neutral interest rate.

Campos Neto’s remarks come a week after the central bank raised rates for the first time in six years to quell inflation, lifting the benchmark Selic rate by 75 basis points to 2.75% and indicating that it will raise by the same amount in May, barring a significant change in the outlook.

They suggest the central bank will front-load its interest rate hikes with inflation running above target, but leave them short of the so-called “neutral” level when the economy runs at full employment and potential growth without fueling inflation.

“A faster adjustment reduces the intensity of the (overall) adjustment … and has an important effect on anchoring longer-term inflation expectations,” Campos Neto said.

“Monetary policy normalization is related to (a return to) the neutral rate. If we talk about partial (normalization), it means that we don’t think this should happen now,” he said.

Campos Neto denied that lowering the Selic to a record low 2.00% last year was a mistake, pointing out that the outlook for inflation and the economy was much weaker, “a scenario that, in truth, did not happen.”

He insisted that the central bank is not behind the curve and that a “large part” of the recent rise in inflation is due to temporary factors. The weak exchange rate has also helped fuel inflation, he said.

Figures on Thursday showed that annual inflation in the month to mid-March was 5.5%, above the central bank’s 5.25% upper limit of its 2021 target band, the center of which is 3.75%.

(Reporting by Jamie McGeever and Isabel Versiani; editing by Jonathan Oatis)

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