Brazil central bank makes 150 bps interest rate hike, signals another

CREDIT INTEREST RATE - BRASILIA. Brazil's central bank on Wednesday raised interest rates by 150 basis points and signaled another such hike in February, waging one of the world's most aggressive battles with inflation even as Latin America's largest economy has tipped into recession.

The bank's rate-setting committee, known as Copom, decided unanimously to raise its benchmark interest rate to 9.25%, as forecast by all 31 economists in a Reuters poll. Policymakers have hiked the rate seven times this year, from 2.0% in January.

That makes Brazil's current tightening cycle the most aggressive among major economies, as the central bank confronts 12-month inflation in double digits and President Jair Bolsonaro's vows to boost welfare spending in an election year.

While acknowledging weaker-than-expected economic activity and uncertainty about the Omicron coronavirus variant, Copom put a harder edge on its policy statement, vowing to hike rates "significantly" into restrictive territory.

"The Committee will persist in its strategy until (consolidating) the disinflation process and the expectation anchoring around its targets," wrote Copom in the statement.

Marco Caruso, chief economist at Banco Original, called it a "very tough" statement, suggesting "higher rates for longer."

Some economists have warned that looser fiscal policy has backfired on the government by forcing the central bank, whose formal autonomy was written into law this year, to hike rates sharply. Higher borrowing costs contributed to a slight economic contraction in the second and third quarters.

A weaker currency, severe drought and higher fuel prices helped to push consumer prices 10.7% higher in the 12 months to mid-November. That is the hottest inflation among G20 countries except for Argentina, which has left interest rates unchanged in 2021, and Turkey, which has shocked markets by slashing rates after raising them early this year.