Brazil's cenbank projected to hike key rate

The Brazilian central bank is expected to start hiking the key interest rate (the Selic) amid fiscal deterioration, rising inflation and higher-than-expected economic growth. 

Monetary easing started in mid-2023, when the central bank started cutting the Selic from 13.75% amid signs of falling inflation. Currently, the rate is 10.50%, which the monetary authority maintained in June, interrupting the easing cycle.

Analysts are projecting the start of rate increases when the central bank announces its decision on September 18.

“Inflation expectations for the coming years have moved away from targets and it is difficult to know whether this will be an interest rate hike cycle of 1.5 or 2 percentage points. What is clear is that we will likely have interest rate hikes in September, November, December and January,” Mansueto Almeida, chief economist at local investment bank BTG Pactual, told a seminar hosted by Fitch Ratings.

"The retail segment will be most impacted by an interest rate increase because it is a sector with a high level of debt. On the other hand, the infrastructure and water sectors, which rely on longer-term financing lines, should not be that much affected by the cycle of rising interest rates," Ricardo Carvalho, managing director of Fitch Ratings' Brazil corporate finance group, told BNamericas.

The central bank’s annual inflation target is 3% with a tolerance range of 1.50-4.50%, and pressure is rising as public spending has increased more than expected and the economy’s performance surprised on the upside in Q2.

Last week, the finance ministry hiked its growth estimate for this year to 3.2% from 2.5%, while the inflation outlook rose to 4.25% from 3.9%.