(Bloomberg) — Brazil’s central bank raised its key rate by a full percentage point for the third meeting and cued a smaller hike at its next gathering as policymakers weigh resilient inflation and signs of an economic slowdown.
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Policymakers led by Gabriel Galipolo lifted the benchmark Selic to 14.25% late on Wednesday, the highest level since October 2016. The central bank has now tightened by 3.75 percentage points over its last five decisions.
In an accompanying statement, board members wrote that inflation projections are both elevated and also becoming further unanchored above target. While overall economic activity and the labor market have shown strength, there are signs of “an incipient moderation in growth,” they wrote.
“In light of the continuation of the adverse scenario for inflation convergence, the heightened uncertainty and the lags inherent to the ongoing monetary tightening cycle, the Committee anticipates an adjustment of lower magnitude in the next meeting, if the scenario evolves as expected,” they wrote.
After their next decision in May, the total size of the tightening cycle will hinge on factors including inflation forecasts and economic data, they said.
Brazil’s central bank delivered more tightening days after a report showed consumer prices posted the biggest monthly surge in three years. Despite signs that growth is easing, with drivers like industry and services ebbing, hefty government spending and a strong jobs market are juicing demand. Put together, markets see inflation above the 3% target through at least 2028.
“The outlook for inflation remains challenging,” said Roberto Secemski, a Brazil economist at Barclays Plc. “The possibility of a more forceful slowdown in activity in the next few months likely influenced their choice as well, so as not to put themselves in a corner.”
Brazil’s borrowing cost increase came hours after Federal Reserve officials held their benchmark interest rate steady for a second straight meeting and transmitted expectations for slower economic growth and higher inflation.
Vague Guidance
Brazil’s central bank had telegraphed its move in December, when it laid out plans for hikes both in January and this month. That guidance signaled a hard-line approach to contain inflation under the leadership of Galipolo, who was tapped by President Luiz Inacio Lula da Silva last year to lead the institution.
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“Brazil’s central bank delivered on a telegraphed 100-basis-point rate hike for a third straight meeting and indicated more to come at a slower pace. The risks of the vague forward guidance may outweigh the merits — markets could come away thinking the central bank has tilted dovish prematurely.”
— Adriana Dupita, Brazil and Argentina economist
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Tighter monetary policy, however, is providing little relief to shoppers stung by soaring grocery bills. Months of bad weather and swings in Brazil’s real have caused prices of many staple foods to spike.
Consumer prices soared 1.31% in February as costs rose in categories including housing, education and food and beverages. Annual inflation accelerated to 5.06%, above the 4.5% upper limit of the central bank’s target range.
In the statement, policymakers wrote that inflation scenarios remain tilted to the upside. They projected consumer price rises at 5.1% this year and at 3.9% in the third quarter of 2026.
“They leave the door open for more tightening after May,” said Alvaro Vivanco, head of strategy at TJM FX. “It’s hard to see this as dovish.”
Last Hike
In recent weeks, Lula’s administration has unveiled measures to rebuild support after his approval hit the lowest level of any point during his time in office. Many of those policies support consumption and risk further pressuring prices.
On Tuesday, the government presented a long-awaited proposal to exempt workers with salaries of as much as 5,000 reais ($885) from paying income taxes. It also has expanded loan options for private sector employees and loosened rules for early withdrawals from workers’ severance fund, known as FGTS.
The administration is acting as the economy is losing momentum. Economists surveyed by the central bank expect gross domestic product to grow 2% this year and 1.6% in 2026, down from 3.4% in 2024.
The central bank statement “brings a language that shows activity is marginally weaker,” said Frederico Catalan, fixed income portfolio manager at Opportunity. “The statement mentions that monetary policy may have delayed effects on activity, which sounds like someone who is closer to the end of the interest rate hiking cycle. The May meeting could be last hike.”
–With assistance from Giovanna Serafim, Robert Jameson and Giovanna Bellotti Azevedo.
(Re-casts story, adds comments from central bank statement starting in third paragraph, economist comments throughout)
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