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UPDATE 1-Brazil central bank delivers rate hike, weighs one more amid election-year spending

·1 min read

(Adds comment from committee statement, political context)

By Marcela Ayres

BRASILIA, Aug 3 (Reuters) - Brazil's central bank on Wednesday raised interest rates by 50 basis points, as widely expected, and left the door open for a smaller "residual" hike in September, pumping the brakes on an economic recovery as an October election approaches.

The bank's rate-setting committee, known as Copom, raised its benchmark Selic interest rate to 13.75%, the highest since January 2017, as forecast by 23 of 29 economists in a Reuters poll.

The Brazilian central bank has hiked rates at 12 straight policy meetings from a record-low 2% in March 2021, battling inflationary pressures from global commodity prices and now an election-year spending spree by President Jair Bolsonaro.

"The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting," Copom wrote in their decision statement, citing "additional fiscal stimuli" as one of the upside risks in their inflation outlook.

Trailing in opinion polls, Bolsonaro pushed a spending package through Congress last month, bypassing a constitutional budget cap to boost welfare payments until December.

Both right-wing Bolsonaro and his leftist rival, former President Luiz Inácio Lula da Silva, have vowed to continue with higher cash handouts next year, adding to challenges for the central bank as it tries to cool demand.

Brazil's IPCA-15 consumer price index rose 11.4% in the 12 months to mid-July, but Copom forecast in its statement that inflation would end the year at 6.8%, down from an 8.8% forecast in June, but still far above its 3.5% official target. (Reporting by Marcela Ayres Editing by Brad Haynes)