Brazil Raises SELIC Rate to 14.25%

The Central Bank of Brazil increased its key interest rate by 50bps to 14.25 percent on July 29th, the highest level since October 2006. It was the seventh consecutive hike as the country struggles to deal with the persistent rise in consumer prices.
Joana Ferreira | 7/30/2015 1:09:52 AM
The decision was expected by markets as inflation accelerated for the sixth straight month in June to a new 11-1/2-year high of 8.89 percent; and remained high at 9.25 percent in the month to mid-July.

Rate hike campaign was initiated last September when inflation reached the upper-limit of official target range of 6.5 percent. Since then, the central bank raised the rate by 325 basis points in an attempt to convince the markets it is committed in bringing inflation back to target.

The government announced last week it would not meet the 1.1 primary fiscal surplus target for 2015 and the goal was changed to cut public spending by 0.15 percent of GDP, leading markets to doubt the government's ability to further implement fiscal austerity in order to fight the growing inflation and to balance public finances. Even so, Brazil's Finance Ministry said on Tuesday, after S&P consider to decline the country's credit rating, it will remain committed to the austerity measures, a move that will deepen the economy's contraction.

At the latest FOCUS Market Readout released on July 24th by the Central Bank, analysts from about 100 private financial institutions expected Brazil's economy to contract by 1.76 percent in 2015 (against a 1.70 percent contraction estimated a week earlier); annual inflation to grow 9.23 percent (against 9.15 percent); and industrial production to decline by 5 percent (the same estimate from a week earlier); unveiling the worst economic performance since 1990.

The Brazilian real has slipped 26 percent this year against the U.S. dollar, hitting its weakest level in more than 12 years on July 29th.

Brazil Raises SELIC Rate to 14.25%