Higher rates add to headwinds for Brazil’s economy

The decision last night by Brazil’s central bank (BCB) to raise interest rates by 50bps to 8.5% was expected, but the accompanying statement suggested that further hikes are likely over the coming months. At this point, we have to put our hands up and say that we’ve been surprised by the hawkishness of the BCB. We’ve now pencilled in a further increase in rates at the next two COPOM meetings in August and October, leaving the Selic at 9.25% at the end of the year. But higher interest rates reinforce our view that the economy will continue to struggle in 2013-15.