Central Bank of Brazil Considers Rate Hike Above 14%

The Central Bank of Brazil has indicated that it may raise borrowing costs above 14% by March due to emerging inflation risks. These risks include persistently strong demand, the weakening of the national currency, and challenges in meeting the inflation target. The central bank's board unanimously agreed on this potential policy action during their December 10-11 meeting, where they also increased the benchmark Selic rate by a full percentage point, bringing it to 12.25%.

The central bankers expressed concern over various inflationary pressures, such as enduring inflation in the services sector, a shift in expectations that could lead to inflation becoming unanchored, and the impact of a depreciating exchange rate. They noted that these factors complicate achieving the bank's 3% inflation target.

In the documented minutes released on Tuesday, the central bank described the current scenario as "less uncertain and more adverse," necessitating prompt policy measures to reaffirm their commitment to guiding inflation back to the set target.

The policymakers, headed by Roberto Campos Neto, have committed to additional rate hikes, each mirroring the recent one percentage point increase, if the expected scenario unfolds as predicted. This resolve comes as annual inflation rates surpass both the 3% goal and the 4.5% ceiling of the tolerance range, with core inflation indices also on the rise.

Despite inflationary concerns, economic activity in Brazil has shown resilience, bolstered by robust household spending. This is attributed to the lowest unemployment rates on record and increased government expenditures. Market participants are factoring in the possibility that the central bank may opt for a rate hike exceeding one percentage point in their upcoming January meeting.

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