Brazil Central Bank Says Cycle of Key Rate Hikes Isn’t Over Yet

(Bloomberg) -- Brazil’s central bank said it was important to signal that its cycle of interest rate hikes will continue in the face of an adverse inflation outlook, according to the minutes to its March 18-19 policy meeting. 

Local food prices are high and can also drive up costs in other sectors, while services inflation has accelerated in recent readings, policymakers wrote in the minutes to the meeting, when they raised the benchmark Selic by a full percentage point to 14.25%, and signaled a smaller rise ahead.

“Due to the lags inherent to the ongoing monetary cycle, the Committee also deemed appropriate to communicate that the next move would be of a smaller magnitude,” they wrote in the document published on Tuesday. “Furthermore, given the heightened uncertainty, it decided to indicate only the direction of the next move.”

Brazil central bankers have raised borrowing costs by 3.75 percentage points since last September as inflation runs hot in Latin America’s largest economy. Factors including extreme weather and swings in the real have pressured the cost of living. While government spending and low unemployment are bolstering demand, there are some signs of a slowdown in activity.

Consumer prices rose 1.31% in February, marking the biggest monthly increase in three years, driven by housing, education and food and beverages. Annual inflation accelerated to 5.06%, well above the 3% target.

Unanchored price forecasts are a factor of discomfort shared by all board members and must be tamed, policymakers wrote. If the bank’s projections are confirmed, 12-month inflation will remain above the upper limit of the target tolerance interval for six consecutive months from January 2025. “Therefore, there would be a target breach with the June 2025 inflation,” they wrote. 

Meanwhile, inflation is hurting President Luiz Inacio Lula da Silva’s popularity. In response, the government has introduced measures to support consumption, some of which also could inadvertently add pressure on prices.

The government has already expanded loan options for private sector employees and loosened rules for early withdrawals from workers’ severance fund, known as FGTS. It also announced a proposal to exempt workers with salaries up to 5,000 reais ($872) from income taxes starting in 2026. 

Investors’ concerns over Brazil’s fiscal discipline and uncertainties over the public debt have the potential to raise the neutral interest rate level, with “deleterious impacts” on the power of monetary policy, central bankers wrote.

Globally, there are significant geopolitical uncertainties and there’s been a deterioration in the international growth scenario, policymakers wrote.

Recent data show local activity becoming uneven. While the central bank’s monthly proxy for gross domestic product rose more than expected in January, both retail sales and services declined that month, while industry stalled.

Analysts surveyed by the central bank see Brazil’s economy expanding about 2% this year and 1.6% in 2026. Both of those estimates fall well short of 3.4% expansion recorded in 2024.

--With assistance from Giovanna Serafim.

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