Brazil’s central bank raises key rate to 12.25%

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Brasília, Brazil — Brazil’s central bank on Wednesday lifted its key interest rate one point to 12.25 percent and warned more hikes were likely to come as it sought to contain high inflation.

The decision by the bank’s COPOM monetary committee came a day after the country posted an annualized inflation rate of 4.87 percent for November.

That was well over the bank’s three-percent inflation target, and over the upper tolerance threshold of 4.5 percent.

“The committee anticipates, if the expected scenario is confirmed, adjustments of the same magnitude in the next two meetings,” the bank said in unusually blunt language.

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The hike announced Wednesday was already the third consecutive increase of the key Selic rate.

Last month, the COPOM committee raised it half a point, and in the previous meeting in September it increased it by 0.25 points.

Its next two meetings will take place at the end of January and in mid-March.

“Headline inflation and underlying measures have been above the inflation target and have risen in recent releases,” the central bank said.

The upwards trajectory for rates comes as Brazil’s economy dashboard is flashing mixed signals.

On one hand, the economy is growing strongly, with expansion forecast at more than three percent by the end of this year. Unemployment is at its lowest level in 12 years.

But the persistently high inflation, a weak currency, and budget pressures over spending are all dealing headaches to the government of President Luiz Inacio Lula da Silva.

Lula is fiercely opposed to higher Selic rates, believing that would hobble corporate investment and make consumer credit more expensive.

The government late last month announced nearly $12 billion in budget adjustments to cap public spending, in order to stabilize the long-term fiscal situation and public debt of over 78 percent of GDP.

In its statement, the central bank said that the market impact of that announcement “significantly affected asset prices and agents’ expectations, especially the risk premium, inflation expectations and the exchange rate.”

It added that, in the COPOM committee’s assessment, “such impacts contribute to more adverse inflationary dynamics.”