Brazil’s central bank promises to raise interest rates to 14.25% in March

(Bloomberg) — Brazil’s central bank raised its benchmark interest rate by a full percentage point and pledged two equally sized hikes at its next two meetings in a bid to restore investor confidence and curb inflation expectations.

Policymakers raised the Selic index to 12.25% late Wednesday, as 14 of 35 economists polled by Bloomberg expected. 20 others predicted a rate hike of 75 basis points, while 1 predicted a smaller increase of 0.5 basis points.

“Given the more adverse scenario for inflation convergence, if conditions develop as expected, the Committee expects to make further adjustments of the same magnitude at its next two meetings,” board members wrote in a statement accompanying their decision.

The central bank also announced that it will hold an auction of up to $4 billion in credit lines on December 12. Through FX credit line auctions, central banks sell so-called spot dollars and commit to buying them back in the near future. in exchange for a certain interest rate. These initiatives attempt to provide liquidity to the spot market.

Central bankers have now raised interest rates by 1.75 percentage points since September, and most analysts expect the tightening cycle to continue into early 2025.

Policymakers, led by Roberto Campos Neto, are under intense pressure to rein in inflation forecasts that are well above their 3% target. Household spending is booming thanks to record-low unemployment and expanded welfare benefits. Investors are also increasingly skeptical of the government’s commitment to shore up public accounts after announcing austerity plans and tax breaks for low-income households.

“This is a very complex moment that forces banks to take stronger action,” Porto Asset chief economist Felipe Sichel said before the decision. Inflation will be higher than currently priced in, he added, citing a more challenging global economic environment and investor distrust of domestic fiscal policy.

Brazil’s economy grew faster than expected in the third quarter, supported by key sectors such as industry and household consumption. GDP is expected to grow by more than 3% in 2024.

Annual inflation accelerated to 4.87% in November, above the upper limit of the 4.5% tolerance range. Consumer prices have been pressured by weakness in the real, which has fallen nearly 20% this year, the biggest fall among major currencies.

Central bankers have repeatedly called for solid fiscal plans to rein in spending, allowing them to resume cutting interest rates. Policymakers had been easing policy throughout May but later reversed course as public spending remained high and inflation expectations rose.

This is the last rate decision for Campos Neto, whose term ends in December. Gabriel Garipolo, a member of the bank’s board of directors and an ally of President Luiz Inacio Lula da Silva, will serve as president starting in January.

Earlier this week, the Senate approved three new bank directors, including Nilton David as monetary policy director. Lula has now appointed a majority of the agency’s board of directors.

—With help from Giovanna Serafim.

(Updated announcement of the fourth section of credit limit auction)

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