What next for Brazil's benchmark interest rate?

Brazil's central bank opted not to change the benchmark Selic interest rate on Wednesday after 12 consecutive increases, but it is expected to keep the rate high for a prolonged period.

The monetary authority kept its base rate at 13.75%, but underlined that inflation pressures remain a concern.

"The central bank will likely keep the interest rate at this level at least until June 2023, due to certain factors. One of these factors is that it will be waiting to see what the new government is in 2023 and how that government's policies will affect the country's fiscal performance and all impacts associated with inflation," Luciano Rostagno, chief Latin America strategist at Banco Mizuho, told BNamericas.

He expects the Selic rate to end this year at 13.75% before being cut to 11.25% in 2023. 

Brazilians go to the ballot box in October to vote for president, state governors and lawmakers, with those elected assuming their posts in January.

In a statement after the rate decision, the central bank said it will remain vigilant on inflation pressures. 

"The [central bank rate] committee underlines that it will persevere until not only the disinflation process is consolidated, but also the anchoring of expectations to its targets. The committee emphasizes that future monetary policy steps may be adjusted and it will not hesitate to resume the adjustment cycle if the disinflation process does not proceed as expected," it said. 

The monetary authority has hiked the Selic aggressively in recent months, from just 2% in January 2021 to the current level.

The decision to keep the rate unchanged comes as Brazil's inflation has shown signs of slowing in recent months, although it remains well above the central bank's target for annual inflation, at 3.5% (±1.5%).

The consumer price index (IPCA) dropped 0.36% in August, the most recent figure published, after slipping 0.68% in July. In the 12 months ending in August, the IPCA was at 8.73%.

In the last few months, inflation has been curbed somewhat, mainly thanks to the reduction of taxes on fuel prices by President Jair Bolsonaro. 

Some analysts point out that these effects on inflation may only be temporary, as the tax cut on fuel prices takes place amid Bolsonaro's re-election efforts, so some tax reductions may be suspended after the elections.

In addition, the escalation of the war in Ukraine is another factor that could produce more inflation.

"At first Russia's war in Ukraine put a lot of pressure on commodity pressures and also deteriorated the already difficult landscape of global supply chains. A further deterioration of the scenario there could generate a new wave of global inflationary pressure," said Rostagno. 

Despite the decision not to raise Brazil's interest rate, it remains one of the highest in the world, only behind that in Argentina, according to a ranking produced by asset management firm Infinity Asset.