Brazil's Banco Central Raises Selic Rate 25 Basis Points to 10.75%, Restarting Tightening

Brazil's Monetary Policy Committee, known as Copom, raised the Selic benchmark interest rate by 25 basis points to 10.75% at its meeting on 18 September 2024, restarting a tightening cycle that had been dormant since August 2022. The decision was unanimous, with all committee members voting in favour of the increase, the Banco Central do Brasil said in a statement published on its website.

The Selic rate had been reduced from a peak of 13.75% during the previous tightening cycle to 10.50% before the September meeting. Copom cited resilient economic activity, labour-market pressures, a positive output gap, higher inflation projections and de-anchored inflation expectations as the drivers of its decision to resume raising borrowing costs.

INFLATION EXPECTATIONS AND FISCAL CONCERNS

The committee's statement highlighted that inflation expectations remained de-anchored, at 4.4% for 2024 and 4.0% for 2025 against the 3% target, and stressed that a credible fiscal policy committed to debt sustainability contributes to anchoring expectations. The committee said perceptions of the fiscal outlook had affected asset prices and agents' expectations, and listed a persistently weaker exchange rate among the upside risks to inflation.

The Banco Central do Brasil operates under an inflation targeting framework.

Copom had previously cut the Selic rate through a multi-meeting easing cycle that began in August 2023.

FIRST HIKE SINCE AUGUST 2022

The September 2024 increase is the first upward move in the Selic since August 2022, when the committee concluded the previous tightening cycle that had brought the rate to 13.75%.

The Banco Central do Brasil did not pre-commit to a path, saying future adjustments would depend on the dynamics of inflation, its projections and expectations, the output gap and the balance of risks. Brazil's central bank has its next scheduled Copom meeting in November 2024.