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Brazil interest rates to reach neutral level in 2022: cenbank director

By Reuters | April 8th 2021

Brazil’s benchmark Selic interest rate is set to reach its neutral level next year, a central bank director said on Thursday, adding that policymakers’ baseline scenario is for a Selic of 3% in real terms, or 6%-6.5% in nominal terms.

In one of the first times a policymaker has offered specific estimates of the so-called neutral rate, economic policy director Fabio Kanczuk said current information and forecasts suggest it would be “very weird” for the Selic to reach its neutral level this year.

“If (we) increase the Selic rate in all the meetings, reaching the neutral rate, I get inflation that is too low in the relevant horizon. So it looks like it’s too much tightening, so I have to go slower than that,” he said in an online event hosted by BNY Mellon.

The neutral rate is the level of official borrowing costs at which the economy runs at full employment and potential growth without fueling inflation.

Assuming the bank’s current outlook for the economy and inflation pans out, “then you should reach the neutral rate when the output gap is close to zero. So that should be in 2022, not in 2021, that’s why you shouldn’t have full normalization in 2021.”

The central bank raised the Selic in March for the first time in six years, to 2.75% from a record low 2.00%, and said it would raise by a similar amount in May, barring any unforeseen shocks.

But with annual inflation currently above 5% and set to rise further in the coming months, many investors are fretting that inflation will end the year above the central bank’s goal of 3.75%.

Kanczuk also said that he does not envisage the central bank including more specific and transparent forecasts for the path of rates in its communications, like some European monetary authorities do.

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