Brazil set to see return to double-digit base interest rate

Brazil looks likely to return to a double-digit benchmark Selic interest rate this week, after nearly five years in single figures, which, if prolonged, could have significant impacts on infrastructure projects. 

"Most of the financing instruments used to finance infrastructure projects are linked to the Selic rate. If the interest rate remains too high for a long period, companies will suffer a major impact to their financial costs," Daniel Keller de Almeida, managing partner at infrastructure consulting firm Una Partners, told BNamericas.

Most analysts expect the Brazilian central bank to hike its Selic base rate to 10.75% from 9.25% on February 2, in order to curb inflationary pressure, while at another rate increase is forecast for the central bank committee's March meeting. 

"We project that the March meeting will make a final increase of 1.00 pp [percentage points], raising the Selic rate to 11.75%," the team of economists at local bank Itaú Unibanco, wrote in a research report. 

"In our view, the decision to end the tightening cycle will be motivated by the decline in inflation expectations for 2023, a slowdown in economic activity and recognition of the lagged effects of monetary policy. However, current conditions and inflation projections may push in the direction of [increasing the rate] 1.50% in March and/or signaling the continuity of the cycle," it said. 

In July 2017, the central bank reduced the Selic rate to single digits and has kept it around those levels until now. In mid-2020, the monetary authority, even reduced the base rate to 2%, the lowest level ever, to mitigate the economic effects of the COVID-19 pandemic.

However, inflation accelerated rapidly in 2021, reaching 10% per annum and forcing the central bank to reverse its strategy, instead adopting a more hawkish stance. 

Now, even with an expected slowdown in inflation during the coming months, the room for the central bank to reduce the benchmark rate has been drastically limited, as the US Federal Reserve has already indicated that it will likely raise interest rates.

Developing countries like Brazil tend to keep their interest rates significantly higher than the Fed rates to attract investors to their bonds in order to finance debt.