Brazil's central bank increased its benchmark interest rate by 100 basis points for the second consecutive meeting on Wednesday and hinted at another similar hike in March, keeping the option open for future adjustments due to rising inflationary pressures. The rate-setting committee, Copom, raised the Selic policy rate to 13.25% in a unanimous decision, marking the first move under the new central bank governor Gabriel Galipolo, appointed by President Luiz Inacio Lula da Silva.
The bank's statement emphasized that the total tightening of the cycle would be influenced by the determination to meet the inflation target. In response to heightened inflation forecasts, which were revised up to 5.2% for 2025 from the previous 4.5%, policymakers noted increased private inflation expectations, robust economic growth, and labor market strains necessitating a more restrictive monetary approach.
The rate hike aligned with expectations from all 38 economists and followed a series of cuts, further widening the interest rate gap between Brazil and the world's largest economy. With a commitment to curbing inflation, the central bank had already indicated rate hikes would commence in 2025, with a two-percentage-point increase. If the projected March hike materializes, Selic would reach 14.25%, its highest point in over eight years.
Analysts expect rates to peak at 15% in May, with some predicting the need to raise rates to 15.50% to anchor inflation expectations. These anticipations highlight the importance of structural adjustments to stabilize public finances, as noted by Marcos Moreira, a partner at WMS Capital. The central bank faces additional challenges as the Brazilian real, though recovering somewhat, remains under pressure at 5.86 per U.S. dollar compared to 4.95 a year earlier, contributing to import-driven inflationary pressures.
Against the backdrop of uncertain inflation dynamics, the central bank forecasts 4.0% inflation for the third quarter of 2026, a period most influenced by current monetary policy decisions.