Brazil Central Bank Raises Rates by 25bps, First Hike in Two Years

• Brazil's central bank kicked off an interest rate-hiking cycle on Wednesday September 18, with a 25 basis-point (bps) increase, as expected and signalled more increases ahead to tackle a challenging inflation outlook amid stronger-than-expected economic activity.
• The bank's rate-setting committee, known as Copom, voted unanimously to raise the benchmark interest rate for the first time in over two years to 10.75%, in line with most forecasts.
• Policymakers said the balance of inflation risks is now tilted to the upside, flagging a stronger-than-expected labour market and robust growth. "The scenario, marked by resilient economic activity, labour market pressures, positive output gap, an increase in the inflation projections, and unanchored expectations, requires a more contractionary monetary policy," they wrote.
• Gustavo Sung, chief economist at Suno Research, said he expected two more rate hikes of the same size in November and December, bringing the benchmark rate to 11.25% at year-end. The central bank had held its policy rate steady at 10.50% in June and July after a series of cuts since last year to bring it down from a six-year high of 13.75%.
• Expectations for a rate hike, the bank's first since August 2022, firmed after second-quarter activity significantly exceeded forecasts, driven by a robust labour market and rising wages in Latin America's largest economy.
• However, bets on tighter policy had been building since late July, when central bank minutes indicated that policymakers would not hesitate to raise borrowing costs if needed amid growing upside risks for inflation.

(Source: Reuters)