BRL: The central bank strikes back - ING

Brazil's central bank, BCB, aggressively hiked rates by 100bp to 12.25% last night and promised two further hikes of a similar magnitude, ING's FX analyst Chris Turner notes.

USD/BRL can go back to 5.80/85 today

"The phrase 'getting ahead of the curve' seems appropriate here as the BCB delivers a forceful signal that the rise in inflation expectations will not be tolerated. In addition, BCB announced a $4bn FX auction today to provide liquidity to the spot market. This aggressive move could carry USD/BRL back to 5.80/85 today."

"However, this aggressive rate hike is entirely down to the loose fiscal policy of the Lula administration and the damage it has done to the exchange rate. Unless some credible fiscal consolidation package is announced, the BRL will stay vulnerable."

"Our position is that fiscal consolidation will be difficult in the run-up to the 2026 Presidential election, and combined with the new US administration's trade war on China - and the threat of secondary sanctions on Brazil - USD/BRL will probably head up to the 6.25 area."