Brazil’s central bank has raised interest rates by 100 bps for the third time, bringing the Selic rate to 14.25%. Future increases may be smaller as the central bank monitors economic slowdown signs. Attention is on new governor Gabriel Galipolo’s management of inflation targets in the context of government stimulus efforts. Recent data shows different trends in economic activity, prompting a revision of inflation forecasts for the coming years.
On Wednesday, Brazil’s central bank increased interest rates by 100 basis points for the third consecutive time, raising the benchmark Selic rate to 14.25%, a level last recorded in 2016. This decision, made unanimously by the central bank’s rate-setting committee, Copom, aligned with the forecasts of all 37 economists surveyed by Reuters. Policymakers indicated a potential for a smaller hike in the next meeting as they closely monitor signs of economic slowdown.
The central bank’s focus is on the guidance established under new Governor Gabriel Galipolo, who took office in January. Galipolo, an ally of President Luiz Inacio Lula da Silva, has adhered to the previous strategy formulated by his predecessor, which included a tightening of 200 basis points during the first quarter. Markets are now particularly attentive to Galipolo’s adjustments regarding addressing inflation while balancing the administration’s economic stimulus plans.
This announcement coincided with the U.S. Federal Reserve’s decision to maintain steady rates, reflecting considerations of Brazil’s economic policies. Despite a 9% appreciation of Brazil’s currency against the U.S. dollar this year, long-term inflation expectations remain lower than desired, indicating challenges in achieving the official target of 3%.
Recent economic data suggest that Brazil’s economic activity faced more significant slowdowns than anticipated in the previous quarter, yet early indicators for the current year appear more stable. The Copom noted that while there are signs of moderation in growth, the economic activity and labor markets are showing resilience. Consequently, the central bank revised its 2025 inflation forecast to 5.1% from an earlier estimate of 5.2%, with expectations for 12-month inflation of 3.9% for the third quarter of 2026, reflecting updated economic conditions.
In summary, Brazil’s central bank has enacted a notable interest rate increase amidst challenges in economic activity and inflation targets. The new governor’s strategic approach appears focused on adhering to established guidelines while navigating the complexities of government stimulus measures. The adjustments signal the central bank’s responsiveness to economic indicators and the evolving financial landscape.
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