Brazil's central bank on Wednesday announced a first interest rate hike since 2015, a surprising 75 basis point increase to 2.75% and anticipated a similar increase in May to fight inflation even as the economy struggles during the pandemic.
The decision to raise borrowing costs comes at a fragile moment, as a deadly second wave of the COVID-19 pandemic is sweeping Latin America's largest economy. Brazil's death toll and case count trails only the United States, and its economy is on course to contract in the first quarter.
Still, the bank's rate-setting committee, known as Copom, said its decision to raise the benchmark rate from a record-low 2.00% was unanimous, and signaled a hike of the same size at its next meeting unless the outlook changes significantly.
With 12-month inflation running at 5.2%, well above the central bank's year-end target of 3.75%, Copom said in its accompanying statement that this marks the start of a partial normalization process for monetary policy.
Copom members consider that the current conditions ceased to prescribe an extraordinarily stimulus, policymakers said, noting that inflation expectations are above target for the relevant policy horizon, including this year and 2022.
For the next meeting, unless there is a significant change in inflation projections or in the balance of risks, the Committee foresees the continuation of the partial normalization process with another adjustment, of the same magnitude, in the degree of monetary stimulus, they said.
Using market-based interest and exchange rate forecasts, Copom said inflation is on course to end this year at 5.0%, uncomfortably close to the upper limit of its target band.
Luciano Rostagno, chief strategist at Mizuho Bank in Sao Paulo, said markets should welcome the decision to hike more aggressively.
Front-loading the policy normalization process is a stronger and quicker way of stabilizing financial markets, supporting the real, and minimizing the risk of inflation ending the year above target, Rostagno said.
It is a signal to the market of maintaining credibility amid rising inflation risks, he said.