U.S. Economic Recovery, Higher Fuel Prices Force Brazil’s Hand in Rate Rise

SÃO PAULO—Brazil on Wednesday became the first major economy to raise interest rates this year, a harbinger for other developing countries that could be forced to raise borrowing costs and endanger their fragile economies.

The central bank’s decision to lift its benchmark lending rate to 2.75% from its record low of 2% comes as inflation hit a four-year high in Latin America’s biggest economy amid a weakening currency and sharply rising fuel prices. On top of that, Brazil is logging nearly a third of all the world’s daily Covid-19 deaths.

Economists say the tightening monetary policy in Brazil underscores risks for emerging markets, many of which have dire outlooks in comparison with developed countries. A strong U.S. recovery is prompting a rise in long-term bond yields, which attracts more investors to buy dollars at the expense of emerging-market currencies. That could lead other developing nations to raise their interest rates to stem the capital outflow, stifling the economic rebound those countries are counting on.

The Brazilian currency has depreciated about 10% against the dollar in the last three months as investors pull their money out of riskier markets that racked up debt during the pandemic, pushing consumer prices higher as imports become more expensive. Rising oil prices, buoyed by a strong recovery in Asian demand, also has increased Brazil’s fuel costs, which helped raise inflation to 5.2% in February, near the top of the central bank’s target range.

“The global monetary backdrop is shifting, and as is always the case, the most vulnerable economies are unfortunately the ones that have to react,”  said Alberto Ramos, a Goldman Sachs economist. “Brazil falls squarely in that category.”

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