By Jeffrey T. Lewis and Paulo Trevisani

SAO PAULO--The Central Bank of Brazil raised its benchmark lending rate by 1.5 percentage points as inflation continues to climb amid growing concern about government spending.

The bank's monetary policy committee on Wednesday increased the Selic rate to 7.75% from 6.25%. It was the sixth consecutive meeting at which the bank raised the Selic, which started the year at a record-low 2%, and an acceleration from the 1-percentage-point increases at the previous two meetings.

The decision by the bank's monetary policy committee was unanimous. The committee said in its statement that it expects to raise the Selic by the same amount at its next meeting, in December.

"Given the deterioration of the balance of risks and the increase in its inflation projections, this pace is the most appropriate to guarantee inflation convergence to the targets at the relevant horizon," the statement read. The committee's "baseline scenario and balance of risks indicate as appropriate to advance the process of monetary tightening even further into the restrictive territory."

The central bank picked up the pace of its rate hikes after inflation accelerated since its meeting in September, and after the government of President Jair Bolsonaro last week said it plans to boost social spending and account for some of the increase outside of a constitutionally imposed spending cap. The move by the administration weakens markets' confidence in the government's will and ability to get spending under control, according to economists.

"Even if the fiscal impact next year is limited in the big scheme of things, what causes concern is the fact that you undermine the credibility of the spending cap if you change it when it's politically convenient," said Roberto Secemski, an economist at Barclays in New York.

Central bank policy makers have been warning about the possible impact on inflation if the government loosened fiscal restraints, and now that those concerns are moving closer to becoming reality, the bank had to react to help anchor expectations, Mr. Secemski said.

"There's an impact on asset prices, including the real, because when you tamper with a fiscal anchor, you don't know what will come next," he said. "The currency could be weaker for a sustained period, and that has consequences on inflation."

In the days last week after the government revealed some of the details of the spending plan, share prices tumbled and the real hit its weakest point against the dollar since April.

Even with another rate increase of 1.5 percentage points in December, the higher rate might not be enough to boost the local currency, said Paloma Brum, an economist at brokerage firm Toro Investimentos.

"It will take something stronger to give investors an attractive risk premium," she said. "The Selic will have to get closer to 10%, even 12%."

The weaker currency will put more pressure on import prices and will exacerbate the impact of the rising price of oil in world markets on domestic fuel prices.

Fuel prices have been one of the main reasons Brazil's inflation has been accelerating in recent months, and will be a factor in October's inflation report as well. Brazilian oil company Petroleo Brasileiro SA, or Petrobras, earlier this week increased the cost of gasoline for distributors by 7% and the cost of diesel fuel by 9%.

Brazil's inflation rate will end this year far above the 5.25% ceiling of the central bank's target range. Consumer prices rose 10.34% in the 12 months through mid-October, surprising economists who had expected the pace of inflation to begin to slow from the 10.05% pace in the 12 months through mid-September.

The central bank's work to get inflation under control in coming months is complicated by the fact that higher interest rates have little or no impact on some prices, according to Emily Weis, emerging markets macro strategist at State Street in Boston.

"We see prices remaining fairly elevated, and some of the areas, particularly food and fuel, that are contributing to those numbers aren't under central bank control," she said, adding that the bank also risks stifling the Brazilian economy's recovery, which is already showing some signs of ebbing. "It's a hard tightrope to walk between controlling inflation expectations and slowing growth."

Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com

(END) Dow Jones Newswires

10-27-21 1844ET