BRASILIA: Brazil’s central bank raised its benchmark interest rate by 100 basis points for the second straight meeting on Wednesday and signaled another hike of that size in March, leaving the door open for subsequent moves amid mounting inflationary pressures.
The bank’s rate-setting committee, known as Copom, lifted the Selic policy rate to 13.25% in a unanimous decision - the first under the new central bank chief Gabriel Galipolo, who was appointed by President Luiz Inacio Lula da Silva.
“Beyond the next meeting, the committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,” said the bank’s statement.
The central bank raised its inflation forecast for 2025 to 5.2%, up from 4.5% previously, well above its target of 3%.
Policymakers highlighted a “significant” rise in private inflation expectations for this year and next, resilient economic growth and labor market pressures, all contributing to the need for “a more contractionary monetary policy.”
The rate increase, in line with the expectations of all 38 economists polled by Reuters, came after the U.S. Federal Reserve held rates steady on Wednesday after a string of cuts, widening the interest rate gap between the world’s largest economy and the biggest in Latin America.
To ease concerns about its leadership transition and show its commitment to taming inflation, Brazil’s central bank had already signaled in December that it would start 2025 with hikes, raising its policy rate by two full percentage points.
The rate increase forecast for March would bring the Selic to 14.25%, its highest level in more than eight years.
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“The central bank delivered on its promise and left the meeting after March open. Clearly, it will remain data-dependent,” said Daniel Xavier, chief economist at ABC Brasil bank, who forecast rates peaking at 15% in May.
So far, the bank’s aggressive stance has not been enough to anchor inflation expectations, which have continued drifting further from the official target of 3% with a tolerance interval of plus or minus 1.5 percentage points.
Marcos Moreira, partner at WMS Capital, said that deanchored inflation expectations would require the policy rate to hit 15.50% this year, part of a growing chorus of economists predicting the Selic above 15% by year-end.
“The only factor capable of changing this scenario would be the government implementing structural adjustments that would allow for a rebalancing of public accounts,” he said.
Adding to the central bank’s challenge, Brazil’s currency slipped to a record low last month on concerns about growing public debt, punctuated by turmoil in financial markets after the government’s proposed spending cuts disappointed investors.
While market stress has subsided since its December peak, interest rate futures remain elevated.
The Brazilian real has regained some ground to start the year but remains under pressure, trading around 5.86 per U.S. dollar compared to 4.95 a year ago, which has added to inflationary pressure by increasing the cost of imports.
Reflecting the challenging inflation outlook, for the third quarter of 2026, the horizon most influenced by current monetary policy decisions, the central bank projected 12-month inflation of 4.0%.
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