The Brazilian central bank BCB aggressively raised interest rates by 100 basis points to 12.25% yesterday and promised two further increases of a similar scale, notes ING currency analyst Chris Turner.

USD/BRL may return to 5.80/85 today

“The phrase ‘ahead of the curve’ seems appropriate here, as the BCB gives a strong signal that rising inflation expectations will not be tolerated. Additionally, BCB today announced a $4 billion foreign exchange auction to provide liquidity to the spot market. This aggressive move could bring USD/BRL back to 5.80/85 today.”

“However, this aggressive increase in interest rates is solely due to the Lula administration’s loose fiscal policy and the damage it has done to the exchange rate. Unless some credible fiscal consolidation package is announced, the BRL will remain vulnerable.”

“Our position is that fiscal consolidation will be complex in the run-up to the 2026 presidential elections, and combined with the recent US administration’s trade war with China – and the threat of secondary sanctions on Brazil – the USD/BRL rate is likely to reach the 6.25 area “