Brazil markets rally as central bank leaves next steps open

BRASILIA, May 8 (Reuters) - Brazilian markets surged on Thursday after the central bank raised interest rates to their highest in nearly two decades but refrained from signaling further steps, with a more favorable global backdrop also buoying sentiment.

By midday the Brazilian real BRBY was up 1.2% against the U.S. dollar in spot trading, while benchmark stock index Bovespa .BVSP jumped over 2.5% to fresh 2025 intraday highs.

While the Federal Reserve held U.S. rates steady on Wednesday and flagged risks of rising inflation and unemployment, Brazil's central bank delivered a 50 basis-point hike, bringing the Selic benchmark interest rate to 14.75% - its highest since August 2006.

The move widened the interest rate differential between Latin America's largest economy and the United States, helping attract foreign inflows.

Risk appetite also improved globally after U.S. President Donald Trump announced a trade agreement with Britain, easing investor concerns following sweeping trade tariffs unveiled in April that had rattled markets.

Brazilian policymakers hinted at the end of their aggressive tightening cycle, totaling 425 basis points since September.

They dropped language about the balance of inflation risks being "tilted to the upside" and stressed the current outlook requires a "significantly contractionary monetary policy for a prolonged period," shifting from previous statements signaling the need for a "more contractionary" stance.

"We are biased to continue trading Brazil on the receiving side, as we still see both local and global hard data will continue to turn lower in upcoming months," Citi economists led by Leonardo Porto wrote in a note, projecting the Selic to remain unchanged through year-end.