Brazil's Central Bank increases basic interest rate to 12.25% per year
The recent surge in the dollar and uncertainties regarding inflation and the global economy prompted Brazil's Central Bank to accelerate the pace of interest rate hikes. The Monetary Policy Committee (Copom) unanimously raised the Selic rate, the economy's benchmark interest rate, by 1 percentage point to 12.25 percent per year. The decision surprised the financial market, which had anticipated a smaller increase of 0.75 points.
In a statement, Copom attributed the higher-than-expected hike to external uncertainties and disruptions caused by the government's fiscal package. The committee indicated it plans to raise the Selic rate by 1 percentage point at its next two meetings, scheduled for January and March, if current projections hold. These upcoming meetings will be chaired by Gabriel Galípolo, the incoming Central Bank president.
“The committee is closely monitoring the effects of recent fiscal policy developments on monetary policy and financial assets. The economic agents’ perception of the latest fiscal announcements has significantly influenced asset prices and expectations, particularly regarding the risk premium, inflation projections, and exchange rates. These impacts have been evaluated as contributing to a more adverse inflationary outlook,” the statement read.
This was the third consecutive Selic rate hike, returning it to the December 2022 level of 12.25 percent per year. Wednesday's increase reinforces the ongoing cycle of monetary policy tightening.
Inflation
The Selic rate is the Central Bank's primary tool for controlling official inflation, as measured by the Broad National Consumer Price Index (IPCA). In November, the IPCA, which tracks official inflation, fell to 0.39 percent. According to Brazil's statistics agency IBGE, this slowdown was driven by the green flag on electricity bills and a decline in fuel prices. However, the prices of food, particularly meat, and airline tickets continued to rise.
As a result, the indicator has accumulated a 12-month increase of 4.87 percent, surpassing this year's target ceiling. For 2024, the National Monetary Council (CMN) has set an inflation target of 3 percent, with a tolerance margin of 1.5 percentage points. Therefore, the IPCA should not exceed 4.5 percent or fall below 1.5 percent this year.
The Copom statement included the Central Bank's revised inflation projections. The monetary authority forecasts the IPCA will reach 4.9 percent in 2024 (above the target ceiling), 4.5 percent in 2025, and 4 percent for the 12-month period ending in the second quarter of 2026. This outlook is based on the Central Bank's "extended horizon," which takes into account the inflation scenario for up to 18 months.
