Brazil's central bank raised interest rates by 100 basis points on Wednesday and signaled same-size hikes for the next two meetings, as it navigates increasing inflation challenges alongside fiscal woes.
The bank's rate-setting committee, known as Copom, unanimously increased the benchmark Selic rate to 12.25%, highlighting the negative impacts of a recent fiscal announcement by the government on asset prices, inflation expectations and the exchange rate.
"The committee judges that these impacts contribute to a more adverse inflation dynamics," said policymakers in the decision statement, the last under governor Roberto Campos Neto's leadership at the central bank.
This follows the release of a highly-anticipated spending cut package by President Luiz Inacio Lula da Silva's administration that fell short of expectations, straining confidence in the government's ability to manage the rising public debt.
Campos Neto, who will be succeeded in January by the current monetary policy director, Gabriel Galipolo, had been emphasizing that a positive fiscal shock would have a significant impact on markets if it changed the outlook for Brazil's public debt, as interest rate futures have surged amid growing fiscal concerns.
Policymakers began tightening in September, stressing that the overall magnitude of the cycle would be determined by the firm commitment to reaching the 3% inflation target — a message that remained unchanged on Wednesday, now accompanied by the forecast of further 100 basis-point hikes in the next two meetings should the scenario evolve as expected.
A Reuters poll of 40 economists revealed that only four anticipated a hike this size, while the majority of 31 projected a smaller 75 basis-point increase, still marking an acceleration from the previous 50 basis-point rise in November.
But bets embedded on the yield curve already pointed to a steeper full percentage-point hike, which hadn't been seen since May 2022.
This increase came as the largest economy in Latin America grapples with rising inflationary pressures amid robust economic activity, a tight labor market, and a sharp weakening of the currency, exacerbated by external factors but intensified by local fiscal fears.
Driving up imported prices, the Brazilian real has depreciated nearly 20% year-to-date against the U.S. dollar, among the worst emerging market performances.
