Brazil central bank raises rates, sees 'very prolonged' pause

Brazil's central bank raised interest rates by 25 basis points on Wednesday and signaled it will keep borrowing costs steady for an extended period, defying expectations that it had already reached the end of its tightening cycle.

The bank's rate-setting committee, known as Copom, decided unanimously to lift the benchmark Selic rate to 15%, the highest since July 2006, marking a seventh consecutive hike as unanchored inflation expectations and resilient activity in Latin America's largest economy kept policymakers on alert.

Of economists polled by Reuters, 27 out of 39 had expected the bank to hold rates at 14.75%. Interest rate futures, however, showed divided expectations, pricing in roughly even odds between a pause and one final hike. (BRLIRPR)

In its statement, the central bank indicated that, after lifting rates by 450 basis points since last September, it now plans to maintain rates at current levels while monitoring inflation's path back toward the bank's 3% official target.

"The Committee foresees an interruption of the rate hiking cycle to examine its yet-to-be-seen cumulative impacts, and then evaluate whether the current interest rate level, assuming it stable for a very prolonged period, will be enough to ensure the convergence of inflation to the target," policymakers wrote.

Adding a hawkish tone, the central bank said it will remain vigilant and won't hesitate to resume rate hikes if needed.

"The committee wants to steer the conversation away from any premature discussion about rate cuts at this point," said Rafaela Vitoria, chief economist at Banco Inter, who still sees a chance of a cut at the December policy meeting.

In May, the central bank had stressed that a "significantly contractionary" stance would be needed for a "prolonged period" to bring inflation back to target, scrapping prior references to needing a "more contractionary" posture.

Policymakers had also removed any form of forward guidance, emphasizing a strictly data-dependent approach. That had led many to bet that the central bank was done with its tightening cycle.

But those views were tempered in recent days after central bank officials flagged that the cycle remained open, citing concerns about unanchored inflation expectations and a desire to keep options on the table as they digested data to calibrate the terminal rate.

On the same day that the U.S. Federal Reserve left rates unchanged but signaled cuts this year, the Brazilian central bank said in its policy statement that economic activity in the country is still showing some strength, despite "some moderation in growth."

Although the Brazilian real (BRBY) has strengthened since the central bank's last meeting, policymakers raised their 2025 inflation forecast to 4.9% from the 4.8% projected in May.

For the end of 2026, the period most influenced by current monetary policy decisions, policymakers held their 12-month inflation outlook at 3.6%.

Economists surveyed in a weekly central bank poll have lowered their inflation forecasts for this year. Still, their latest estimate is well above the bank's projection, at 5.25%.

Longer-term expectations show no improvement, staying far from target as many anticipate the leftist administration of President Luiz Inacio Lula da Silva will pursue stimulus ahead of the 2026 election, potentially undermining the central bank's efforts to cool demand and bring inflation down.