Brazil's central bank raised its benchmark interest rate, Selic, by 100 basis points for the second straight meeting last Wednesday and anticipated another similar hike in March, concerned about mounting inflationary pressures.

The bank's monetary committee, Copom, lifted the Selic policy rate to 13.25% in a unanimous decision, the first under the new central bank Chief Gabriel Galipolo, who was chosen and appointed by President Lula da Silva.

“Beyond the next meeting, the committee reinforces that the total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,” said the bank's statement.

The central bank raised its inflation estimate in 2025 at 5.2%, up from 4.5% and well above its target of 3%.

Markets in Brazil seem to have been losing confidence in the Lula “magic’ and are expecting a “significant” rise in inflation expectations for this year and 26, resilient economic growth and labor market pressures, which is also reflecting in the president’s support.

The central bank had already signaled in December that it would start 2025 with hikes, raising its policy rate by two full percentage points, and the rate increase forecast for March would bring the Selic to 14.25%, its highest level in more than eight years.

So far, the bank's aggressive stance has not been enough to anchor inflation expectations, which have continued drifting further from the official target of 3% with a tolerance margin of plus/minus 1.5 percentage points.

Marcos Moreira, partner at WMS Capital, said that subsiding inflation expectations would require the policy rate to hit 15.50% this year, part of a growing chorus of economists anticipating the Selic above 15% by year-end.

Adding to the central bank's challenge, Brazil's currency slipped to a record low last month on concerns about growing public debt, punctuated by turmoil in financial markets after the government's proposed spending cuts disappointed investors.

The Brazilian currency Real has regained some ground to start the year, following a massive intervention with billions of dollars, but remains under pressure, trading around 6,00 per U.S. dollar compared to 4.95 a year ago, which has added to inflationary pressure by increasing the cost of imports.