Brazil seen raising Selic rate 25 bps to 12.5 pct

All 21 analysts polled by Reuters see the
benchmark Selic lending rate rising by 25 basis points to 12.50
percent next week from 12.25 percent.

Forecasts diverged as to where the Selic rate would stand
at the end of the year. The year-end forecasts ranged from
12.50 percent to 13.25 percent, with nine analysts seeing the
rate at 12.75 percent.

FACTORS TO WATCH: Annual inflation has continued to rise
beyond the ceiling of the government’s target range. Through
June, the benchmark IPCA price index reached 6.71 percent,
above the target of 4.5 percent plus or minus 2 percentage
points.

President Dilma Rousseff has described the fight against
inflation as her top priority, ordering $30 billion in budget
cuts earlier this year and giving the central bank full
autonomy to raise interest rates — already up 150 basis points
in 2011.

Yet the bank has also
been hesitant to raise rates too far too fast, conscious that Brazil’s
interest rates are already among the world’s highest. The rates have
attracted a torrent of capital inflows from the developed world, where
real rates are near zero, pushing up Brazil’s currency and raising the threat of asset bubbles within the broader economy.

Despite the risks, above-expected inflation in June means
the bank likely has no choice but to raise rates another 25
basis points at the next meeting, analysts said.

“The central bank’s own words indicate that it’s going to
follow through on necessary tightening to get inflation back
within the target range. And all the indicators show an
inflationary outlook that is still worrying,” said Silvio
Campos Neto, an economist at Tendencias consultancy.

MARKET IMPACT: Higher interest rates will put further
pressure on the real BRBY, which is already seen by analysts
as the world’s most overvalued major currency.

Traders and analysts will likely pay more attention to the
statement accompanying the decision, which could provide clues
as to whether and when the central bank will raise rates
again.

In the poll, 14 of 16 economists saw the bank raising rates
another 25 basis points at its next meeting in August.
($1 = 1.57 reais)