The FINANCIAL — Brazil’s central bank left its benchmark Selic interest rate unchanged on October 21 at 14.25%, and reiterated the rate should remain at that level until the country’s stubborn inflation starts to slow, according to Nasdaq.
Consumer prices have been rising at more than double the pace of the central bank’s 4.5% target since July, forcing the bank to push the Selic up to its highest point since 2006.
The statement announcing the decision repeated much of the language from the previous meeting, saying that rates need to remain at this level for a “sufficiently prolonged period” for inflation to move back toward the target. But it left out a line from the previous statement suggesting inflation would converge with the target at the end of 2016.
The bank’s job of preserving Brazilians’ buying power has been complicated this year by a mix of political turbulence, currency depreciation, rising public debt and a deep recession.
Gross domestic product is set to shrink by 3% in 2015, according to forecasts compiled by the central bank. The high borrowing costs usually prescribed to kill inflation are aggravating the slowdown, economists say.
The slowing economy has reduced tax receipts, outweighing government spending cuts and sending the budget deficit higher. Meanwhile, support for the administration in Congress has waned as President Dilma Rousseff’s approval ratings have plunged and lawmakers have refused to pass many of Finance Minister Joaquim Levy’s proposed austerity measures intended to shrink the deficit and reduce debt levels.
But solving the fiscal puzzle is crucial to stabilizing prices because uncertainty about debt is weakening Brazil’s currency and putting pressure on prices via imports, according to Roberto Padovani, chief economist at São Paulo brokerage Votorantim Corretora.
“The central bank isn’t worried about inflation in 2015 anymore because it’s already out of control,” he said. “Now the question is if they can contain the contagion of that inflation for 2016.”
The real has weakened 4.6% versus the dollar since the central bank’s previous rate-setting meeting on Sept. 2, and is down 32% from the start of this year.
The government recently slashed fiscal targets and surprised analysts by admitting that it won’t be able to make any savings to pay down debt until 2017.
On October 22, Planning Minister Nelson Barbosa told reporters that tax receipts have undershot estimates and the government is discussing whether even the reduced 2015 fiscal target will be achieved.
The fiscal troubles have increased forecasts that Brazil’s debt will grow to around 70% of gross domestic product as early as next year, a level many economists consider too high.
In September, Standard & Poor’s Ratings Services downgraded Brazil’s sovereign debt to junk status, and Fitch Ratings last week cut the debt by one notch, keeping Brazil one step above junk.