Brazil central bank raises interest rates to highest level in nearly 20 years

Brazil's central bank implemented a significant increase in interest rates on May 5, 2025, raising the Selic rate by 50 basis points to 14.75%. This decision marks the sixth consecutive rate hike aimed at tackling persistent inflation that remains far above the target of 3%. The bank's monetary policy committee, known as Copom, expressed that a contractionary monetary strategy would be necessary for an extended duration to control inflation while acknowledging that current economic indicators suggest a possible moderation in activity. While the recent hike aligns with forecasts from the majority of economists, Copom has indicated a cautious approach for future policy modifications amid global uncertainties. The environment surrounding economic policy is challenging due to fluctuating commodity prices and trade dynamics influenced by U.S. tariffs, leading policymakers to emphasize flexibility in their approach. Experts, including Flavio Serrano from BMG Bank, anticipate that while a smaller rate increase might be considered in the June meeting, the possibility of holding rates steady at 14.75% is more likely. The latest monetary tightening has come in response to an annual inflation rate of 5.49%—significantly above targets, sparking skepticism regarding the return to target levels by 2028. The rate increases, totaling 425 basis points since September 2024, underscore the central bank's commitment to combat inflation while monitoring economic conditions. Policymakers noted that the situation requires careful evaluation of diverse and broad data to ensure decisions are well-informed and adjusted to emerging economic trends. Brazil's current economic landscape is complicated by external pressures and domestic initiatives led by President Luiz Inacio Lula da Silva's government, which has introduced stimulus measures amid declining approval ratings. The situation thus presents a balancing act for the central bank as it navigates between raising rates to combat inflation and responding to evolving economic indicators that suggest a potential cooling in growth and consumption.