By Marcela Ayres

BRASILIA, Reuters – Brazil’s average annual inflation reached over 10% in 2021. This is well beyond the target range of the central bank for the year and puts pressure on policymakers to increase interest rates.

According to statistics agency IBGE, last year’s benchmark IPCA consumer price index grew 10.06%, which is the highest annual rate of change since 2015. This result exceeded the median 9.97% forecast by economists in a Reuters poll.

Roberto Campos Neto (the central bank chief) was legally required to send an open letter explaining the reasons why annual inflation fell below the target range. Since 1999, the inflation-targeting program was in place, it was the sixth time such a letter was written. It was last seen in 2017.

Campos Neto stated that steps were taken to meet inflation targets for 2022 and 2023, as well as 2024. He reiterated the necessity to continue raising rates “significantly beyond restrictive territory”.

Brazil’s central banking took advantage of an inflation spike to raise its benchmark rate by 9.25% from 2% March.

Already, policymakers signaled a 150-basis point increase in February. They also said that the country’s tightening monetary policies may continue until inflation expectations return to track. Campos Neto reiterated this message in his letter.

Brazil was in recession due to higher borrowing costs last year. This has helped to reduce inflation pressures over the past months.

Inflation in the country in December fell to 10.74% from November. This is the first decrease since May 2020.

The 2021 full print still missed the central bank’s annual goal of 3.75% as well as the top limit of its tolerance range of 5.25%.

IBGE stated that December saw an increase of 0.73%, exceeding the forecast 0.65% in a Reuters poll. The rise was primarily due to clothing costs, which increased 2.06%.

Last year’s sharp increase in Latin America’s largest economy was due in large part to transport, which saw annual increases of 21%. The 49% rise in fuel costs annually was the main reason. The annual increase in housing prices was 13%. Electricity saw a 21% rise.

Campos Neto stated that inflation was not at the target due to higher import prices, particularly oil and other commodities. In his letter, Campos Neto stated that the weakness of the currency was also a contributing factor to this impact due to fiscal concerns during the second half.

Campos Neto also mentioned an increase in energy prices as well as global supply chain bottlenecks, which are both causes of inflation.

Inflation and rising interest rates are expected to be a drag on the economy by 2022 according to analysts. This will impact household demand as well as discourage corporate investment.

In their latest weekly survey of economists, the central bank found that they had lowered their economic growth forecasts to just 0.2%. They also expected an inflation rate of 5.03%. This is again higher than the official inflation target at 3.50% in 2022. However, there’s a 1.5 percentage point error.