Brazil raised its benchmark interest rate by 75bp for the third consecutive time and will potentially consider further increases as forecasted inflation surges despite aggressive monetary tightening this year. On Wednesday, the central bank lifted the Selic to 4.25% and will terminate all stimulus, according to Bloomberg. In the bank’s next meeting in August, they predict another 75bp hike or an even larger increase. According to the bank’s statement, “a deterioration of inflation expectations for the relevant horizon may require a quicker reduction of the monetary stimulus”. In Brazil, policymakers are hiking rates aggressively as the pace of consumer prices are reaching a five-year high. The rising commodity costs and higher electricity bills due to a drought are contributing to inflationary pressures. The simultaneous emergency government spending during the coronavirus outbreak has further heightened demand. Adriana Dupita from Bloomberg predicts a quicker reduction in stimulus that will see the “Selic at 6.5% by year-end, up from our previous estimate of 5.5%”. Analysts saw Brazil’s annual inflation hike up to 8.06% last month, above many forecasts and more than double this year’s goal of 3.75%. According to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc, the central bank “are ready to raise the Selic to any level needed to make sure inflation projections stay in line with its goals.”

Brazil’s 2.875% 2025s are up 0.2, currently trading at 103.258. Its 4.75% 2050s are up 0.38, currently trading at 97.75.

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