Brazil raised interest rates by a greater-than-expected 100 basis points on Wednesday, leaving the benchmark borrowing rate at 12.25%. The move, driven by inflation concerns and a weakening currency, could see the benchmark rate reach 14.25% as early as March.
The central bank’s decision, made by the Copom committee, was seen as a sign that new Governor Gabriel Galipolo will maintain his predecessor’s hawkish stance on fighting inflation. The government-announced spending package fell short of expectations, and policymakers attributed the move to its impact on Brazil’s real currency, asset prices, and inflation expectations.
The revised inflation estimates from the central bank now project 4.9% inflation this year, up from 4.6%. The benchmark rate is expected to rise further in the coming months, driven by a tight labor market and robust economic activity.
Analysts warned that managing expectations will be challenging for the new Governor, with some predicting more aggressive tightening cycles and others seeing a shift towards fiscal dominance. The central bank’s decision on Thursday will be closely watched as policymakers hold a U.S. dollar auction to manage the currency’s depreciation.
The Brazilian real has depreciated nearly 20% year-to-date against the U.S. dollar, making this move the latest in a series of rate hikes aimed at curbing inflation and strengthening the currency.
Source: https://www.reuters.com/markets/brazils-central-bank-steps-up-tightening-with-100-basis-point-rate-hike-signals-2024-12-11