Brazil’s central bank hikes interest rate for first time in two years

FILE / STOCK

Rio De Janeiro, Brazil — Brazil’s central bank on Wednesday announced its first interest rate hike in two years, raising the benchmark lending rate to 10.75 percent even as the US Federal Reserve decided to lower borrowing costs.

The central bank of Latin America’s biggest economy raised the rate by a quarter of a percentage point over inflation concerns, marking a setback for President Luiz Inacio Lula da Silva, who had pushed hard for lower rates.

The move came on the same day the US Fed lowered its benchmark rate for the first time in four-and-a-half years, shaving off half a percentage point to leave it at between 4.75 percent and 5.00 percent.

READ: Brazil central bank leaves rate unchanged

Wednesday’s increase won the unanimous approval of members of the Central Bank’s Monetary Policy Committee (COPOM).

COPOM said “the greater than expected dynamism” of the economy and labor market, together with a stubbornly high inflation rate, had convinced it of the need to raise rates, as a cooling measure.

The committee also said it could not rule out further hikes at their next meeting in November, depending on inflation.

The bank had kept the benchmark Selic rate unchanged at 10.5 percent in June and July after seven consecutive cuts.

‘Irrational’ rates

Haunted by a history of hyperinflation, Brazil went on one of the most aggressive monetary tightening cycles in the world when the Covid-19 pandemic and then Russia’s invasion of Ukraine sent global prices on an upward spiral in early 2021.

After returning to power in January 2023, Lula pushed hard for cuts, saying a high Selic was “irrational” and stunting growth.

READ: Brazil economy picks up as shoppers spend more

The bank began a cycle of gradual reductions last August 2023.

Inflation slowed to 4.24 percent year-on-year last month but still remains close to the upper limit of 4.5 percent set by the Central Bank.

Lula argues that inflation is “under control” and that high interest rates are stifling investment by making it too expensive for households and businesses to borrow.

Unemployment in Brazil fell by 1.1 percentage points to 6.8 percent between May and July.

The government has forecast growth of 3.2 percent this year, but markets expect it to reach 2.68 percent.