Brazil hikes interest rate, eyeing inflation

Brazil's central bank raised its benchmark interest rate Wednesday by a larger-than-expected 0.75 point to 2.75 percent, as rising inflation forced it to reverse its pandemic stimulus stance.

Brushing off criticism that the hike came too soon for an economy still being battered by Covid-19, the bank's monetary policy committee indicated another hike of the same magnitude could be coming at its next meeting in May.

It was the first rate hike in six years for Latin America's biggest economy, which weathered last year's Covid-19 meltdown relatively well thanks in part to a record-low interest rate of two percent.

Now, the economy is showing signs of another slowdown, just as a surge in virus cases and deaths wreaks new havoc – arguably not a good time to raise interest rates, putting the brakes on even more.

But policymakers are nervous about rising inflation and the Brazilian real's slide against the dollar.

"Barring a significant change in inflation projections or the balance of risks facing the economy, the committee foresees continuing the process of partially winding down its monetary stimulus with another adjustment of the same magnitude" in May, the bank said in a statement.

Brazil's annual inflation rate came in at 5.2 percent in February, above the bank's target of 3.75 percent and nearly scraping the top of its tolerance range of plus or minus 1.5 percentage points.

The Brazilian real has meanwhile skidded, closing at 5.59 to the dollar Wednesday.

That is down nearly 16 percent from a year ago, making it one of the worst-performing emerging-market currencies.

'Hasty move'

With Brazil's economic growth outlook flagging, some analysts and voices in the business sector complained the rate hike came too soon.

"This is a hasty move," said the Industrial Federation of São Paulo State (FIESP), Brazil's industrial hub. "There is still much uncertainty hovering on the economic horizon in the medium term. We believe increasing the Selic rate is not the best solution at this time."

Brazil's economy contracted by 4.1 percent in 2020 – less than feared at the height of the pandemic implosion.

It is forecast to rebound partially with growth of 3.23 percent this year.

But that outlook has been getting worse. It is down from 3.43 percent four weeks ago.

Highlighting the tricky mix of factors facing Brazilian policymakers, the rate hike came on the same day the US Federal Reserve left its own benchmark interest rate untouched at near-zero.

Fed Chair Jerome Powell vowed to keep the stimulus stance in place "for as long as it takes."

Brazil's rate had been at two percent since August 2020. Analysts had forecast a hike of just half a percentage point.

The decision came as Brazil's health system – and economy – reeled from the latest surge in Covid-19, which far-right President Jair Bolsonaro has drawn criticism for trying to downplay.

The country's seven-day average death toll hit a new high of 2,017 Wednesday.

Nearly 285,000 people have died of Covid-19 in Brazil, second only to the United States.