Brazil seeks to curb rising inflation

Brazil’s central bank raised interest rates by 50 basis points in the second such move this year as it seeks to curb rising inflation.

New central bank head Alexandre Tombini boosted the benchmark Selic rate to 11.75 per cent on Wednesday night as he seeks to balance rising inflation against a strong currency.

“The Copom (monetary policy committee), decided unanimously to raise the Selic rate,” the central bank said, without elaborating.

Brazil’s economy is expected to have grown about 7.5 per cent in 2010 and is on track for further expansion this year on the back of rising consumer credit and investment.

The government is expected to release fourth-quarter gross domestic data on Thursday. The rapid growth has also rekindled inflation and attracted foreign investment inflows that have strengthened the Brazil’s currency, the real.

At 6.08 per cent in the 12 months to mid-February, inflation is above the central bank’s target of 4.5 per cent, plus or minus 2 per cent.

In an effort to reduce over-heating in the economy, Brazil’s new President Dilma Rousseff has announced an R$50bn downward revision of its budget for 2011.

But government spending is still expected to increase compared with last year in real terms (after adjusting for inflation), economists say.

Brazilian industrial output had shown signs of weakening late last year but in January it rose 0.2 per cent compared with December.

This sparked a rise in yields on interest rate futures contracts on Wednesday as investors bet that the central bank would raise interest rates faster than expected.

“January industrial surprised favourably … suggesting industrial sector momentum may be picking-up again,” said RBC in a research note.

It said it expected GDP growth to be higher than government forecasts at about 7.7 per cent to 8 per cent for full-year 2010.

The strong growth in the economy, buoyant government spending and the threat of higher oil prices from the Middle East crisis will raise concerns that the central bank will have to keep its foot on the brake longer to take the heat out of Brazil’s economy.

But economists expect it to combine any further interest rate increases with “macro-prudential measures”, such as reserve requirements and other steps.

Brazil already has the highest real interest rates of any large economy and Ms Rousseff has stated that she wants to reduce them over time.