Monday, December 23, 2024

Brazil Central Bank Pledges to Hike Rates to 14.25% by March

(Bloomberg) — Brazil’s central bank increased the benchmark interest rate by a full percentage point and promised to deliver two hikes of the same size in the next two meetings as it rushes to recover investor confidence and tame inflation expectations.

Policymakers boosted the Selic to 12.25% late on Wednesday, as expected by 14 of 35 economists in a Bloomberg survey. Twenty others forecast a hike of 75 basis points, while one projected an even smaller, half-point increase.

“In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected,” board members wrote in a statement accompanying their decision.

The central bank also announced that it would hold a credit line auction of up to $4 billion on Dec. 12. Through FX credit-line auctions, the central bank sells the so-called dollar spot and pledges to buy it back in the near future in exchange for a certain interest rate. Those moves try to supply liquidity to the spot market.

Central bankers have now lifted rates by 1.75 percentage points since September, and most analysts see the tightening cycle extending through early 2025.      

Policymakers led by Roberto Campos Neto are facing intense pressure to tame inflation forecasts that are well above the 3% target. Household spending is running hot due to record low unemployment and expanded welfare benefits. Investors are also growing increasingly skeptical of the government’s pledges to shore up public accounts, after an austerity plan was announced together with tax breaks for low-income families.

“It’s a very complex moment that forces the bank to act more strongly,” Felipe Sichel, chief economist at Porto Asset, said before the decision. Inflation will be higher than what’s currently priced in, he added, pointing to a more challenging global economic environment and investor mistrust of domestic fiscal policy.

Brazil’s economy expanded more than forecast in the third quarter, supported by key sectors from industry to family consumption. Gross domestic product is on track to increase over 3% in 2024.

Annual inflation accelerated to 4.87% in November, above the 4.5% tolerance range ceiling. Consumer prices have been pressured by a weaker real, which has tumbled nearly 20% this year, the biggest drop among major currencies.

Central bankers have repeatedly called for a credible fiscal plan that can rein in expenditures, allowing them to resume interest rate cuts. Policymakers had been easing policy through May before reversing course as public spending remained high and inflation forecasts rose.

This was Campos Neto’s last rate decision, as his term ends in December. Gabriel Galipolo, a bank board member and an ally of President Luiz Inacio Lula da Silva, will assume the post as governor beginning in January. 

Earlier this week the Senate approved three new bank directors, including Nilton David as monetary policy director. Lula has now named the majority of the institution’s board members.

–With assistance from Giovanna Serafim.

(Updates with credit line auction announcement in fourth paragraph)

More stories like this are available on bloomberg.com

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