Central Bank hikes interest rates by 1.5 points

In a widely expected move, the Central Bank’s Monetary Policy Committee voted to raise benchmark interest rates in Brazil by 1.5 percentage points.

The Selic rate sat at a rock-bottom level of 2 percent at the beginning of this year, but the committee has progressively jacked it up as a way to tame inflation. Yesterday, the IPCA-15 price index — a mid-month predictor of official inflation — reached its highest level for October since 1995: 10.34 percent over the last 12 months.

Even if markets were aware that interest rates would not remain at the low levels seen 10 months ago, the monetary authority is hiking them at a faster pace than initially anticipated. The 1.5-point increase was the biggest since 2002.

Besides a rising inflation rate, the bank is also weighing in the government’s lack of commitment to austerity — after the administration moved to breach the federal spending cap in order to boost its welfare budget (instead of cutting other types of non-essential spending).

“In spite of the more positive public accounts data, the committee assesses that recent questioning regarding the fiscal framework increased the risk of de-anchoring inflation expectations, raising the upward asymmetry in the balance of risks,” wrote the committee. “For the next meeting, the committee foresees another adjustment of the same magnitude.”

Private bank Itaú believes that higher interests will cool off the economy — leading Brazil into a recession next year.

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