Brazil's Copom raises Selic rate by 50 basis points to 11.25% as tightening cycle extends

The Monetary Policy Committee (Copom) of Banco Central do Brasil voted unanimously on 6 November 2024 to raise the Selic benchmark interest rate by 50 basis points to 11.25%. It was the committee's second consecutive increase, following a 25 basis-point rise to 10.75% in September.

The committee said the scenario remained marked by resilient activity, labour market pressures, a positive output gap, rising inflation projections and unanchored expectations, which demanded a more contractionary monetary policy. Headline inflation and underlying measures had been above the target in the most recent releases.

Inflation expectations for 2024 and 2025 in the central bank's Focus survey stood at around 4.6% and 4.0% respectively. Copom's own inflation projection for the second quarter of 2026, its relevant policy horizon, was 3.6% in its reference scenario, and the committee said it saw an upward asymmetry in its balance of risks.

FISCAL POLICY AND THE EXCHANGE RATE

Copom said perceptions of the fiscal outlook had significantly affected asset prices and agents' expectations, especially the risk premium and the exchange rate. It reaffirmed that a credible fiscal policy committed to debt sustainability, with structural budget measures, would help anchor inflation expectations and reduce risk premia. Among the upside risks to inflation, it cited a combination of domestic and external policies with inflationary effects, for example through a persistently more depreciated exchange rate. It also described the external environment as challenging, mainly because of uncertainty over the US economy.

The committee did not commit to a specific path for future moves. It said the pace of future adjustments and the total magnitude of the tightening cycle would be dictated by its firm commitment to bringing inflation to target and would depend on inflation dynamics, projections and expectations, the output gap and the balance of risks. All nine members of the committee, chaired by central bank governor Roberto Campos Neto, voted for the decision.