The 100-basis-point hike announced Wednesday marks the fifth consecutive increase, pushing the benchmark interest rate to its highest level since 2016
03/20/2025
As expected, the Central Bank’s Monetary Policy Committee (COPOM) raised the benchmark Selic interest rate from 13.25% to 14.25%. The key question now is what comes next. On this front, the committee indicated that, if the expected scenario is confirmed, the adjustment at the May meeting will be of a “smaller magnitude.”
The unanimous decision marks the fifth hike in the monetary tightening that began in September 2024, bringing the Selic to its highest level since October 2016, during the Michel Temer administration. This move also signaled the end of the forward guidance introduced in December when the Central Bank raised rates by 100 basis points and indicated two more hikes of the same size in January and March.
The COPOM justified this week’s decision by pointing to a “challenging scenario” for inflation convergence. “Given the persistent adverse conditions for inflation convergence, the high level of uncertainty, and the inherent lags in the ongoing tightening cycle, the committee anticipates, if the expected scenario is confirmed, a smaller adjustment at the next meeting,” it said.
The committee refrained from making commitments beyond May, saying only that the total magnitude of the tightening cycle will be guided by its “firm commitment” to bringing inflation back to target. Future decisions will depend on inflation dynamics, forecasts, expectations, the output gap (a measure of economic slack), and the overall risk balance.
The assessment that inflation risks remain skewed to the upside was maintained. The statement also reiterated that market perceptions regarding fiscal policy continue to have a “significant impact” on asset prices and expectations.
Inflation forecasts
However, the COPOM slightly lowered its inflation forecasts for 2025, from 5.2% to 5.1%, and for the relevant monetary policy horizon—now the third quarter of 2026—from 4% to 3.9%. The inflation target is 3%, with a tolerance band of 150 basis points in either direction.
“The latest scenario is marked by further de-anchoring of inflation expectations, high inflation projections, resilient economic activity, and labor market pressures, all of which require a more contractionary monetary policy,” the committee said.
Regarding economic activity and the labor market, the COPOM maintained its previous assessment that indicators remain strong but noted this time that growth is showing “early signs of moderation.”
In its January meeting minutes, the COPOM had already mentioned “incipient” signs of “some moderation” in growth but cautioned that the data was high-frequency and required careful interpretation. This view was later echoed by Central Bank Chair Gabriel Galípolo and Economic Policy Director Diogo Guillen in public statements.
The Central Bank’s Economic Activity Index (IBC-Br), a GDP proxy, rose 0.89% in January from December, exceeding market expectations. However, in December 2024, the index had shown a 0.60% drop compared to November.
Regarding the external environment, the COPOM highlighted that global conditions remain “challenging,” particularly due to economic policies in the United States, and pointed to uncertainties surrounding U.S. trade policy and its potential effects.
Following the decision, Finance Minister Fernando Haddad attributed the rate hike to the guidance issued at the end of 2024. “The Central Bank president said the guidance would be followed,” he said.
On the same day, the Federal Reserve kept its benchmark interest rate unchanged in the 4.25%-4.50% range. After the decision, Fed Chair Jerome Powell said that a significant portion of this year’s inflation is expected to come from trade tariffs imposed by President Donald Trump. However, he noted that it is still too early to determine the full impact.
*By Gabriel Shinohara and Alex Ribeiro, Valor — Brasília and São Paulo
Source: Valor International