Brazil at Risk of Steeper Rate Hikes, Former Central Banker Says

• Brazil’s central bank is at risk of having to raise interest rates more than expected just a month after surprising investors with a bold rate hike, according to former central bank chief Gustavo Loyola.
• The central bank raised the benchmark funds rate by 75 basis points to 2.75% last month and indicated another increase of the same size in May. The move -- the first this year among the Group of 20 nations -- surprised economists, who had expected a 50 basis point hike, but now traders are already pricing in an even stronger tightening, according to Loyola.
• The recent agreement over this year’s budget left several loose ends that will continue to spark uncertainty about the country’s fiscal accounts, further complicating the central bank’s job, he said.
• The steady rise in COVID-19 infection rates since November of last year continues to cast a shadow on economic prospects for Brazil as consumers and businesses struggle to reconcile the urge to stay safe with the need for incomes and revenues. This along with reductions in fiscal support as the government turns to heal its finances, and the now less accommodative monetary policy to contain inflation, will adversely impact the recovery forecasts for consumers and corporates, and result in only a modest expansion in 2021.

(Source: Bloomberg & NCBCM Research)