Brazil: Inflation Rate Surprise Prompts Interest Rate Hike January 2014

Brazil: Inflation Rate Surprise Prompts Interest Rate Hike – January 2014

British Embassy Brasilia


Brazilian Central Bank raises the base interest rate by 50bps, more than expected, after surprise jump in inflation in December to 5.91%. Central Bank unsuccessful in keeping inflation below 2012 level. Holding down administered prices is depleting fiscal coffers .  US Federal Reserve tapering may increase inflationary pressures. Determination in combating resistant inflation is welcome but its effect weakened as other key interest rates do not rise in tandem.


On 15 January the Central Bank’s Monetary Policy Committee raised the base interest rate (SELIC) by 50bps to 10.5%, surprising some market commentators who expected a smaller rise. The Committee were responding to higher than expected inflation in December, 0.91%, the highest monthly increase in over a decade, driven by increases in petrol and diesel, air travel, food, and transport prices. The surprise meant the Central Bank missed their unofficial aim of keeping inflation below the 2012 level of 5.84%. Inflation ended 2013 at 5.91%.

Inflation would have been much higher if it were not for strict control of administered prices (e.g. bus, petrol, electricity prices) which rose just 1.5%. Unregulated prices rose 7.5% in 2013. This was the seventh consecutive rate hike dating back to April 2013, when rates were 7.25%, as the Bank seeks to prevent inflation gathering speed. But inflationary pressures will persist through 2014 .  Central Bank Governor Tombini highlighted the recent exchange rate depreciation, cost pressures in the labour market, and recent pressure in the transport sector. The labour market is very tight, with unemployment reaching a historic low of 4.6% in November, compounded, in part, by more people staying in education. The World Cup and Olympics will bring higher prices in the air travel, hotel and restaurant sectors.

Tapering of quantitative easing (QE) by the US Federal Reserve presents another source of concern, likely leading to a stronger dollar and further inflationary pressure. As a relatively closed economy, the direct effect from higher import prices will be limited. But Petrobras has high dollar denominated debts, and imports oil which it pays for in dollars and sells at the administratively set domestic price in Real. There are waves of media speculation about when the next round of petrol and diesel prices increases may happen. But rising petrol and diesel prices inject inflation directly into the transport sector, as in December. Brazilian airlines face similar issues with rising dollar costs .  

The high fiscal cost of holding down administered prices amidst threats of a debt downgrade mean that the Government needs space to increase administered prices, perhaps by up to 4.5%. Forcibly cutting electricity prices by 20% cost the Federal Government almost £6bn in compensation to electricity companies last year. Without this the Government would have come much closer to its original primary surplus target of £28bn  States and municipalities too are suffering, as they hold down bus prices and lose the additional tax revenue higher fuel and electricity prices would bring.

Increases in the base interest rate are only partially passed through to other interest rates in the economy. The development bank BNDES, for example, lends out money at 1% above the long term interest rate (currently 5%), far below the SELIC. Consumer interest rates are also slow to respond to an increase in the SELIC. Despite an increase in the SELIC interest rate of 275bps in 2013, interest rates for individuals only went up by 65bps and for organizations by 119bps.

Brazilian households spend 46% of their budgets on debt servicing and repayment, meaning they will feel the squeeze if interest rates continue to rise. But memories of hyperinflation are ever-present, and for the time being, rising prices, especially in food and bus transport, appear to  represent a major priority for the authorities. 




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Countries: Brazil
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