Brazil's central bank raises interest rate to meet inflation target

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Portugal, August 4 - Brazil's central bank announced that its key interest rate has increased for the first time in its history since 2003 by a full percentage point and will step on the policy stringing accelerator even harder if that is what it takes to meet its inflation target for 2022.

With inflation going significantly over the mandatory target range of the central bank this year, policymakers said they stand ready to raise borrowing costs beyond the so-called 'neutral' rate to bring inflation back in line.

If the decision to raise the benchmark for the Selic rate was in line with the prediction of 37 of 46 economists in a Reuters poll, it could be very helpful for reversing the weakening of the Selic rate. There had been three consecutive rate increases of 75 basis points.

At this moment, the Copom's baseline scenario and balance of risk indicate as appropriate a tightening cycle of the policy rate to a level above the neutral, the central bank's rate-setting committee known as Copom in its accompanying statement.

The Committee understands that, at this moment, the strategy of a quicker monetary adjustment is the most appropriate to guarantee the anchoring of inflation expectations, it added.

Copom said its baseline scenario forecasts inflation of around 6.5% this year, 3.5% next year and 3.2% in 2023. This scenario assumes a Selic rate of 7.00% at the end of this year and entire 2022, dropping to 6.50% in 2023, it said.

A neutral policy rate is the level of interest that causes full employment and maximum economic output without fuelling inflation. In Brazil, economists reckon the Selic rate is around 3% in real terms, meaning that a neutrized rate of around 6.5% assuming the Central Bank meets its inflation target of 3.5% in 2022.