Brazil's Central Bank Increases Interest Rate to Highest Level in Nine Years

 On Wednesday, Brazil’s central bank raised its key interest rate by one percentage point to 14.25%, the highest level in nine years, in an effort to curb inflation in Latin America's largest economy. This marks the fifth consecutive rate increase and goes against the wishes of leftist President Luiz Inacio Lula da Silva, who has called for lower rates to stimulate economic growth.

The bank’s Monetary Policy Committee attributed the hike to a "challenging external environment," ongoing domestic inflation, and signs of "incipient moderation in growth."

The committee also indicated that if current conditions persist, a smaller rate increase may be implemented at its next meeting in May.

The rate has not been this high since between July 2015 and October 2016, during a period of severe economic recession in Brazil. Lula, facing low approval ratings, argues that high interest rates stifle growth by making credit more expensive for both consumers and investors.

Central banks typically raise rates to control inflation by curbing consumer and business spending, which in turn reduces demand. Last month, Brazil’s inflation rate hit 5.0% year-on-year, marking the highest increase since September 2023 and surpassing the government’s target upper limit.

Experts consulted by the central bank predict the year-end inflation could reach 5.66%.

In response to persistent food inflation, the government recently removed import tariffs on basic goods like meat, coffee, sugar, oil, and corn.

Despite Lula's economic challenges, Brazil reported a low unemployment rate of 6.5% between November and January and an economic growth of 3.4% in 2024, the best performance since 2021.