Brazil Central Bank Hikes Interest Rate As Lula's Woes Mount

Brazil's central bank on Wednesday hiked its key interest rate to 13.25 percent in more bad news for leftist President Luiz Inacio Lula da Silva's government, which is struggling to curb high inflation.

The bank's fourth consecutive increase of the benchmark Selic rate comes amid already high investor concerns over Brazil's ballooning public debt, which is getting ever more costly to service.

The interest rate decision was the first taken under the leadership of new central bank chief Gabriel Galipolo, appointed by Lula, who has fiercely opposed higher interest rates.

In a statement, the central bank said another one-point increase was expected at its next meeting in March.

Beyond that, the tightening cycle will depend on whether inflation targets are met, and on future projections.

"It is a headache that has no end in sight," Carla Beni, an economist with the Getulio Vargas Foundation told AFP.

She said that the high interest rates were making financing more expensive for the population "and this ends up hindering the economy as a whole."

Beni said that each percentage point increase meant an expense of 50 billion reais ($8.5 billion) for the Treasury to pay out to those holding government bonds.

"So our fiscal expenditure will increase significantly."

Brazil closed 2024 with annual inflation at 4.83 percent, pushed above target by higher food prices after a year in which crops were hard hit by floods and drought.

A central bank bulletin rounding up market expectations on Monday indicated inflation would hit 5.50 percent in 2025.

The 79-year-old Lula is battling several economic headaches and has held a string of high-level meetings in recent days to analyze how to lower food prices, such as reducing import tariffs on certain goods.

His government, battling a series of disinformation scandals over economic announcements, was also forced to deny it was planning more interventionist methods to lower food prices.

With less than two years left of his third presidential term, Lula's approval rating has sunk to 47 percent, according to a Quaest poll published this week, with a notable drop in support from his key electoral base in the low-income northeast of the country.

Concerns over Brazil's ability to curb public spending in December sent its currency, the real, to record lows against the dollar, although it has since recovered slightly.

A recent editorial in the respected Folha de Sao Paulo newspaper noted that rather than taking unpopular measures and sorting out accounts at the start of his term, which would have given him more budgetary leeway closer to the next election, Lula kicked off his third mandate with an increase in spending.

This boosted economic growth but did not pay off in popularity ratings.

"The electoral frenzy evident in Brasilia makes it seem less likely that a budget adjustment capable of restoring the credibility of the government's accounts will be made," said the editorial.