Brazil central bank hikes Selic rate to 14.25% amid inflation

On Wednesday, Brazil’s central bank raised its benchmark lending rate by 100 basis points, bringing the Selic rate to 14.25% per annum. The move comes as a response to persistent high inflation projections and the need for a more contractionary monetary policy. The bank also signaled a potential smaller rate hike in its next meeting, reflecting ongoing economic challenges both domestically and globally.

The global economic environment, particularly influenced by uncertainties in the United States’ trade policy, has prompted caution among emerging market economies. Major central banks are striving to curb inflation amidst labor market pressures, and the external environment demands vigilance.

Domestically, Brazil has seen robust economic activity and labor market indicators, although there are signs hinting at a gradual slowdown in growth. Inflation remains a concern, staying above the target and showing an uptick in recent measures. The Focus survey has revealed a significant rise in inflation expectations for 2025 and 2026, now at 5.7% and 4.5%, respectively. The central bank’s projections for the third quarter of 2026 sit at 3.9%.

The risks to the inflation outlook are skewed to the upside, with potential factors such as a prolonged period of inflation expectations becoming unanchored, persistent services inflation, and the impact of domestic and international policies that could lead to a more depreciated currency. Conversely, risks to the downside include a potential sharper slowdown in domestic economic activity and a less inflationary environment for emerging economies due to international trade or financial shocks.

The Committee is closely observing fiscal developments and their influence on monetary policy and financial asset prices. Market perceptions regarding fiscal regimes and debt sustainability are notably affecting asset prices and expectations.

Acknowledging the need to address the further deanchoring of inflation expectations and the high inflation projections, the central bank’s decision to increase the Selic rate is in line with its strategy to bring inflation closer to the target over the relevant horizon for monetary policy. This approach also aims to mitigate economic fluctuations and promote full employment.

While anticipating a possible smaller adjustment at the next meeting, the Committee emphasized that the total extent of the tightening cycle will hinge on a steadfast commitment to the inflation target. Factors such as inflation dynamics, projections, expectations, economic activity, and risk balance will be considered in future policy decisions.

The decision to raise the Selic rate was supported by all Committee members, including Governor Gabriel Muricca Galípolo and fellow members Ailton de Aquino Santos, Diogo Abry Guillen, Gilneu Francisco Astolfi Vivan, Izabela Moreira Correa, Nilton José Schneider David, Paulo Picchetti, Renato Dias de Brito Gomes, and Rodrigo Alves Teixeira.

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