Brazil’s central bank raises interest rates by 100 basis points, signals more to come amid fiscal woes By Reuters

Author: Marcela Aires

BRASILIA (Reuters) – Brazil’s central bank raised interest rates by 100 basis points on Wednesday and hinted at hikes of the same size at its next two meetings, as it faces mounting inflationary challenges alongside fiscal woes.

The bank’s interest rate-setting committee, known as Copom, unanimously raised the benchmark Selic rate to 12.25%, highlighting the negative impacts of the government’s recent fiscal announcement on asset prices, inflation expectations and the exchange rate.

“The committee assesses that these impacts contribute to less favorable inflation dynamics,” policymakers said in a statement on the decision, the latest under central bank governor Roberto Campos Neto.

This followed the announcement of a long-awaited package of spending cuts by the administration of President Luiz Inácio Lula da Silva that fell short of expectations, undermining confidence in the government’s ability to manage a rising public debt.

Campos Neto, who will succeed current monetary policy director Gabriel Gallipolo in January, stressed that a positive fiscal shock would have a significant impact on markets if it changed the outlook for Brazil’s public debt, as interest rates rose amid growing fiscal concerns.

Policymakers began to tighten in September, stressing that the overall size of the cycle will be determined by a firm commitment to hitting the 3% inflation target – a message that remained unchanged on Wednesday and is now accompanied by a forecast of further 100 basis point increases over the next two meeting, the scenario should develop as expected.

A Reuters poll of 40 economists found only four expected an increase of this size, while a majority of 31 predicted a smaller increase of 75 basis points, still marking an acceleration from the previous 50 basis points in November.

But bets embedded in the yield curve were already pointing to a steeper percentage rise than had been seen since May 2022.

The increase came as Latin America’s largest economy grapples with rising inflationary pressures amid strong economic activity, a tight labor market and a sharp weakening of the currency, exacerbated by external factors but fueled by local fiscal fears.

Boosting import prices, the Brazilian real has depreciated nearly 20% since the start of the year against the US dollar, among the worst emerging markets.