(Bloomberg) -- Brazil’s central bank raised its interest rate by a quarter-point and said more hikes are coming on resilient growth and inflation expectations, moving in the opposite direction of the Federal Reserve and regional peers.
Policymakers raised the benchmark Selic to 10.75% late Wednesday in an unanimous vote marking first hike since 2022. The decision was expected by 31 of 35 economists in a Bloomberg survey. Two others forecast a bolder, half-point rise, and the remaining two estimated no change.
In a statement, board members wrote the risks to their inflation outlook are tilted to the upside and the scenario requires more restrictive monetary policy. They refrained from providing specific guidance about coming moves.
“The pace of future adjustments of the interest rate and the total magnitude of the cycle that just started will be determined by the firm commitment of reaching the inflation target and will depend on the inflation dynamics,” policymakers wrote.
The decision turns Brazil into an outlier as other central banks across the region cut rates to bolster weak economies. It’s a huge shift for policymakers led by Roberto Campos Neto who halted an easing cycle just three months ago before taking a tougher stance on inflation. Higher public spending and a tight labor market are underpinning both consumption and price pressures while also keeping cost-of-living estimates above the bank’s 3% target through 2027.
“The tone in the statement was harsher, underscoring the need to maintain restrictive monetary policy until the inflation slowdown consolidates,” said Rafaela Vitoria, chief economist at Inter. “The committee should continue with a short hiking cycle with the goal of re-anchoring expectations.”
Brazil’s decision came hours after the Federal Reserve lowered its benchmark interest rate by a half percentage point in an aggressive start to a policy shift aimed at bolstering the US labor market. Chile, Peru, Mexico and Colombia have all lowered their borrowing costs in recent weeks.
Output Gap
In their statement, Brazil policymakers wrote economic activity and the labor market have been stronger than expected, and they now see the output gap as positive. Various measures of underlying inflation are above target, they wrote.
What Bloomberg Economics Says
“Although the decision was broadly expected, the statement may not placate everyone. The BCB wants to convince markets it’s willing to do whatever it takes to slow inflation to the target. At the same time, it doesn’t want to fully endorse market pricing on the pace or extent of the cycle. Policymakers may attempt to clarify the conflicting messages in the minutes of this meeting, to be released on Sept. 24, and their quarterly inflation report, due out Sept. 26.”
— Adriana Dupita, Brazil and Argentina economist
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Gross domestic product expanded more than estimated by all economists in the second quarter, a strong sign that activity is holding up despite high borrowing costs. President Luiz Inacio Lula da Silva’s fiscal policies are boosting family consumption as income levels rise and unemployment stays low.
Annual inflation slowed from the top of the tolerance range to 4.24% in August, according to the national statistics institute.
As Brazil kicks off a tightening cycle that clashes with rising public spending, some question how effective the central bank can be in taming price growth.
“This hiking campaign’s ability to cool down demand is really small,” said Tatiana Pinheiro, an economist at Galapagos Capital Invest. Retail surveys “clearly” show that income — and not loans — are the the main driver for business. Since borrowing costs are not the top determinant, the main result of tighter policy will be weaker investments, she said.
Manufacturing and other credit-driven sectors stand to face higher costs of rolling over debt. With gross government debt near 80% of GDP, more exorbitant interest payments will also be a challenge for the government.
Inflation Forecast
Last month, Lula nominated Monetary Policy Director Gabriel Galipolo as the next central bank governor, and his Senate hearing is scheduled for Oct. 8. In recent weeks, Galipolo said a rate hike was being considered by the bank’s board, which will do whatever is needed to bring inflation back to target.
That task may be easier said than done. In the Wednesday statement, policymakers raised their inflation forecast for the first quarter of 2026 to 3.5% from 3.4% and said the decision to hike rates was consistent with the strategy of having consumer price growth at a level “around its target.”
“Considering that inflation remains above the target and the economic activity is actually picking up, we believe that the risk is of the Copom going beyond our 12% terminal Selic forecast, rather than to stop hiking before reaching that level,” Caio Megale, chief economist at XP Investimentos, wrote in a note.
By contrast, Mexico’s benchmark rate currently stands at the same level as Brazil’s, though it’s expected to continue falling later this month. Peru has the lowest borrowing costs among Latin America’s major economies, at 5.25%, just below Chile’s, at 5.5%.
“It’s better to be an interest-rate outlier, than one due to high inflation,” said Fernando Goncalves, an economist at Itau Unibanco.
--With assistance from Giovanna Serafim and Leda Alvim.
(Re-casts story, adds details from statement starting in third paragraph, economist comments starting in sixth)
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