By Jeffrey T. Lewis and Paulo Trevisani
SÃO PAULO--Brazil's central bank raised its benchmark lending rate by one percentage point as consumer prices continue to rise rapidly and said it expects to increase it by the same amount at its next meeting in October.
The central bank's monetary policy committee on Wednesday raised the Selic, as the key rate is known, to 6.25% from 5.25%, as expected. It was the second consecutive increase of that size, following increases of 75 basis points at each of the previous three meetings. The Selic began 2021 at a record low of 2%.
Another rate increase of one percentage point would be appropriate to ensure the inflation rate will fall to the central bank's target, it said in its statement. The central bank will monitor the economic situation and update its policy if necessary, it added.
The central bank's monetary policy committee "emphasizes that its future policy steps could be adjusted to ensure the achievement of the inflation target and will depend on the evolution of economic activity, on the balance of risks, and on inflation expectations and projections for the relevant horizon for monetary policy," the statement said.
Brazil's 12-month inflation rate reached a five-year high of 9.68% in August, higher than expected, as a steep currency depreciation and a drought in many parts of the country pushed prices higher.
The government has also increased spending to fend off the impact of economic restrictions imposed to fight Covid-19, which has killed nearly 600,000 Brazilians.
The central bank has pointed to the fiscal stimulus as something that could push inflation beyond its target.
Economists say higher government spending bumps up demand, pressuring prices.
Brazilian power companies have had to fire up more expensive fuel-burning plants, and passed the higher cost along to consumers, after reservoirs behind the country's many hydroelectric plants have fallen to low levels. The drought has also hurt crops and pushed food prices higher.
Brazilian farmers and power companies are counting on more rain through the end of this year, and in mid-September precipitation increased in some areas, but it is still too early to say if there will be enough improvement to help.
"There's a lot of uncertainty, more than anything else about energy," said Mauricio Nakahodo, senior economist at Banco MUFG Brasil. "That could impact the economy next year, and some see the possibility of some power rationing if the rain doesn't come back. That could have an impact on economic growth next year."
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com
(END) Dow Jones Newswires
09-22-21 1821ET
