Brazil central bank hikes interest rate, fearing inflation

[BRASÍLIA] Brazil's central bank raised its benchmark interest rate by 100 basis points on Wednesday, to 5.25 per cent, its fourth straight hike as soaring inflation forces policymakers to unwind their pandemic stimulus stance.

The increase, which was in line with analysts' expectations, was the biggest in 18 years for Latin America's largest economy.

The central bank said another increase "of the same magnitude" to the Selic rate was likely at its next meeting, set for September 22.

Its previous three increases had been by 75 basis points each.

The accelerating rate hikes have rapidly brought the Selic up from its all-time low of two percent a year ago, when the first wave of Covid-19 was ravaging the country.

Brazil's inflation rate has surged from 2.13 per cent in June 2020 to 8.35 per cent a year later, crashing through the central bank's target range of 2.25 to 5.25 per cent.

That has left the bank's monetary policy committee scrambling to contain rising prices - even though raising interest rates puts a brake on economic growth at a time when pandemic uncertainty still looms large.

Brazil has recorded nearly 560,000 Covid-19 deaths, second only to the United States, and has struggled to get vaccines to its 212 million people as far-right President Jair Bolsonaro continues to defy expert advice on fighting the pandemic.

Mr Bolsonaro, who is trailing leftist ex-president Luiz Inacio Lula da Silva in the polls for Brazil's October 2022 elections, currently faces a Senate inquiry into allegations of mismanagement and corruption in his government's response to Covid-19.

Analysts polled by the central bank forecast Brazil's economy will grow by 5.3 per cent this year, after contracting by a record 4.1 per cent in 2020.

Economic growth hit a stronger-than-expected 1.2 per cent in the first quarter of 2021, returning the economy to its pre-pandemic level.

That has policy makers looking more nervous over inflation than growth as they navigate the traditional trade-off between the two.

The Selic rate stood at 4.5 per cent in January 2020, before the pandemic hit Brazil.

AFP