Central Bank of Brazil to Hike Interest Rate to 8.00% Amid Inflation, Political Pressures

• Fitch Solutions is raising the end-2021 benchmark interest rate forecast for Brazil by a further 100bps to 8.00%, from the prior forecast of 7.00%, in response to persistent inflationary pressures and deteriorating investor sentiment triggered by political volatility. 
• The primary driver of the Banco Central do Brasil’s (BCB) increasingly aggressive rate hiking cycle remains persistent inflationary pressures. Higher electricity costs due to a historic drought (much of Brazil's energy is hydropower) and transport costs, due to higher oil prices, have begun filtering into rising prices across goods and services categories. 
• While the 2021 forecast is in line with consensus, Fitch’s core view for 2022 is for the Banco Central do Brasil to cut the Selic rate to 7.50% in 2022 in response to falling inflation, against consensus expectations of a hold at 8.00%. 
• Risks to the outlook are towards higher interest rates prevailing in 2022, as political volatility surrounding the approaching general election campaign will risk triggering capital outflows.

(Source: Fitch Solutions