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Brazil’s Central bank raised its benchmark interest rate by 25 basis points to 10.75% on Wednesday, signaling the start of an interest rate-hiking cycle to combat rising Inflation fueled by strong economic activity.

The rate hike, the first in over two years, was widely expected and came in response to higher-than-expected economic growth. The Central bank‘s rate-setting committee, Copom, unanimously voted for the increase and hinted at further hikes in the future to meet Inflation targets.

While the U.S. Federal Reserve embarked on an easing cycle, Brazil took a different path by starting a tightening cycle and leaving room for larger rate increases.

According to Copom’s policy statement, future rate adjustments will be determined by the goal of reaching the Inflation target and will depend on Inflation dynamics. Policymakers noted upside risks to Inflation due to a strong labor market and robust growth.

Economists predict two more rate hikes of the same magnitude in the coming months, with the benchmark rate expected to reach 11.25% by the end of the year. The Central bank had kept rates steady at 10.50% in recent months before the latest increase.

Expectations for a rate hike grew after second-quarter economic activity exceeded forecasts, driven by a strong labor market and rising wages. The Central bank had indicated a willingness to raise rates if necessary in response to Inflation risks.

Inflation in Brazil reached 4.24% in August, prompting the Central bank to revise its Inflation forecasts upwards for this year and 2025. The projections are above the 3% target with a margin of 1.5 percentage points on either side.

The last interest rate hike prior to this one was in August 2022, not June 2022, as previously stated.

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