Brazil keeps rates as spat with Lula fuels inflation bets

Brazil’s central bank has kept its key interest rate unchanged for the fourth straight meeting, expressing concern about a rise in inflation expectations that were further fuelled by tensions with the new government of President Luiz Inacio Lula da Silva.

Policymakers kept the benchmark Selic at 13.75%, as expected by all analysts in a Bloomberg survey.

The decision, the first since Lula took office on Jan 1, was in line with previous bank guidance of holding rates for “a sufficiently long period” in efforts to bring inflation toward target.

The central bank’s board “emphasises that it will persist until the disinflationary process consolidates and inflation expectations anchor around its targets,” policymakers wrote in a statement accompanying their decision, adding that expectations “have shown deterioration at longer horizons since the previous meeting.”

Earlier on Wednesday, the Federal Reserve slowed the pace of rate increases but said more hikes are in store.

Policymakers led by Roberto Campos Neto are battling rising cost-of-living expectations that make it more difficult to justify rate cuts, even as annual inflation has consistently eased over the past few months to 5.87%, from last year’s peak of more than 12%.

The decline has been driven by tax cuts and restrictive borrowing costs, but fuel prices are going up while core measures that strip out the most volatile are accelerating.

Lula has questioned the central bank’s independence and its inflation goals, suggesting it should pursue a 4.5% target.