Brazil: Copom unanimously raises Selic by 100bps to 13.25%, signals same hike in March

• Copom follows the guidance presented at December meeting
• Copom forecasts inflation of 5.20% in 2025, which is significantly above 4.50% target band ceiling
• Copom maintains guidance of another 100-bp hike in March but provides no indications beyond that

The BCB's Monetary Policy Committee (Copom) unanimously decided Wed. evening to raise the Selic policy rate by 100bps to 13.25% from 12.25%, as expected, according to a?statement. This marks the fourth consecutive hike and the second increase of this magnitude and was previously indicated by the Copom after its December meeting. The Copom kept its inflation risk balance tilted to the upside, emphasizing the need for a more contractionary monetary policy due to further de-anchoring of inflation expectations, economic resilience, and labor market pressures. The committee also reaffirmed its guidance for the next policy meeting in March, when the Selic is to be again hiked by 100bps, this time to 14.25%. But the Copom provided no guidance beyond that.

On the domestic scenario, the Copom noted that economic activity and labor market strength persist and that inflation measures continue to exceed the target and have risen in recent releases. For the relevant monetary policy horizon (Q3 2026), the committee kept its inflation forecast at 4.00%, which remains within the 4.50% ceiling of the +/- 1.50-pp tolerance band around the 3.00% target. For 2025, in turn, the Copom raised its inflation forecast to 5.20% from 4.50% in the last meeting, and that is well above the target ceiling. The committee also reiterated it is closely monitoring fiscal policy developments, particularly their effects on market expectations and asset prices, which remain under pressure due to uncertainty regarding the fiscal framework and debt sustainability.

The Copom also kept risk in its inflation outlook skewed to the upside. Such risks include a prolonged period of de-anchored inflation expectations, service inflation remaining above projections due to a bigger output gap, and inflationary pressures from external and domestic factors, such as persistent FX depreciation. On the downside, risks include a sharper-than-expected slowdown in domestic economic activity and a less inflationary scenario for emerging markets due to global trade disruptions and tighter financial conditions. We note that these two downside risks were adjusted from the previous minutes, which had previously identified a more severe-than-expected global economic slowdown and a stronger-than-anticipated impact of contractionary monetary policies on global disinflation.

The Copom highlighted the continued challenging global environment, characterized by uncertainties regarding US monetary policy and central banks' commitment to restoring inflation to target levels.

Overall, the Copom met its guidance and unanimously raised the Selic rate by 100bps to 13.25%, marking the second consecutive increase of this magnitude. It also continued to guide expectations to expect 100-bp hike at its next meeting on Mar 18-19, bringing the rate to 14.25%. Once again, deviating from its guidance would carry a significant cost to the institution's credibility, particularly as a majority of the committee is now composed of members appointed by President Lula da Silva, including Governor Gabriel Galípolo. In our view, the committee maintained a hawkish stance despite changes in its composition and the lack of forward guidance beyond March. However, compared to the December meeting, the tone was slightly less hawkish, likely due to the current political calm in Brazil (with Congress in recess) and the recent appreciation of the national currency -- a key factor behind the harsher stance in the previous minutes. Despite the lack of guidance, the Copom reinforced its commitment to inflation control and noted that the terminal rate of the tightening cycle will depend on the evolution of inflation dynamics. The minutes of this meeting will be released next Tuesday (Feb 4) and should provide further details on the committee's discussions.