Brazil’s central bank has raised its key interest rate from an all-time low and signalled another increase is likely against a backdrop of concerns about rising prices in an economy hit by a new wave of Covid-19.

Banco Central do Brasil, or BCB, announced a 75 basis-point increase on Wednesday evening, higher than the half-percentage point that many economists had pencilled in, as inflation forecasts for this year overshoot the official target.

The move lifts the benchmark Selic rate from the previous level of 2 per cent it was pegged at since August, a historic low in a country where double-digit interest rates were for years a legacy of battles with runaway prices.

Several observers had predicted that Wednesday’s decision would herald the start of a tightening cycle.

The bank’s monetary policy committee suggested as much, saying it would boost rates by the same amount again at its next meeting in May “unless there is a significant change in inflation projections or in the balance of risks”.

Its statement referred to uncertainty over economic growth in light of the recent surge in coronavirus cases, rising commodity prices fuelling inflation and risks around fiscal policy.

Before the decision, Alberto Ramos, Latin America chief economist at Goldman Sachs, said a normalisation of monetary policy was “in order” in Brazil, but there was “no reason to hit the panic button at this stage”.

“It’s a balancing act between an economy that’s weak and [inflation] headwinds that have intensified in the short-term,” he said. “They can’t really hike too much because the economy is pretty weak.”

Inflation rose past 5 per cent in February for the first time in four years and is expected to touch 4.6 per cent this year, according to a central bank survey of economists published this week. The institution has targeted 3.75 per cent for the year.

The BCB, led by Roberto Campos Neto, will have weighed up the need to keep a lid on this pressure, spurred by higher fuel and food prices, against the potentially damping effect of higher rates on Latin America’s biggest economy.

With unemployment already elevated, Brazil is in the throes of a second onslaught of Covid-19 more deadly than the first. Daily fatalities hit a record of 2,841 this week, and the country reported a record one-day increase of 90,303 new infections on Wednesday.

Many municipalities have implemented various degrees of lockdowns to curb infections as intensive care wards reach capacity.

A steeper Selic may also provide some support to the exchange rate, which has weakened as investors worry about government spending and borrowing levels. The Brazilian real is among the worst-performing major emerging market currencies this year.

William Jackson, chief emerging markets economist at Capital Economics, said fiscal concerns “have made foreign investors wary about investing in Brazil”.

“The other is that real interest rates are so low, probably minus 1.5 to minus 2 per cent,” he added.

Brazil’s Congress last week approved an $8bn emergency aid bill that paves the way for President Jair Bolsonaro’s administration to relaunch a cash transfer scheme for the nation’s poorest people, which is expected to include four monthly payments of R$150 to R$375 ($26-$66).

While there are questions about the government’s commitment to fiscal rectitude ahead of elections next year, the package was broadly welcomed by economists and investors for its limited impact on Brazil’s growing debt pile.

André Perfeito, chief economist at the brokerage Necton, said the tone of the central bank’s statement “should calm some investors”.

“Long-term interest rates are expected to fall tomorrow and the dollar should decline [against the Brazilian real] in Thursday’s trading session as well,” he added.

Wednesday’s decision was the first test for the BCB since it was formally granted autonomy this year, a move intended to eliminate the risk of political interference in setting interest rates.

Additional reporting by Carolina Pulice