BRASILIA: Brazil's central bank on Wednesday raised its key interest rate a half a percentage point to 11.75 percent as it turned the screw further on climbing inflation. The increase, which put the base rate at the highest in the G20 group of developed and emerging economies, was expected, given inflation of 5.9 percent last year, well above the government target of 4.5 percent. It was likely, though, to undermine government efforts to slow the appreciation of Brazil's currency, the real, whose soaring value against the dollar is sapping exports. The interest rate hike was the second consecutive increase by the central bank's monetary policy committee. In January, the institution also added 50 basis points to the key SELIC rate. Analysts predict another tightening in April. "The economy is zooming along, demand is a lot stronger than supply, and the central bank had to raise the rate to get inflation within the limits," an economist at the Brazilian Economic Institute of the Getulio Vargas Foundation, Fernando de Holanda Barbosa, told AFP. Brazil's new president, Dilma Rousseff, a trained economist herself, vowed Tuesday she would not let inflation run out of control. Her country has traumatic memories of hyperinflation in the 1980s and 1990s that at one point reached 2,000 percent a year. A return to those bad days would erode the wealth residents in Latin America's biggest economy have accrued over the past decade, when inflation was kept under tight rein and growth bloomed. To that end, Rousseff has ordered $30 billion in cuts to public spending. And her finance minister, Guido Mantega, said Tuesday he believed inflation was already starting to ebb after recent upward momentum fuelled by higher food and transport prices. Brazil's manufacturing sector, though, is complaining loudly about the successive rate hikes, which are pushing up the value of the real, making exports less competitive, and increasing their costs.
"We are witnessing the strangulation of the national economy," the Sao Paulo state Federation of Commerce said in a statement Wednesday. It blamed the inflation spike on the United States and its ultra-easy monetary policy. Brazil's government says it expects the economy to cool to a more-manageable 4.5-5.0 percent this year, after shooting up an estimated 7.5 percent last year that strained its saturated infrastructure beyond capacity. Economists stressed that, in the short term at least; Brazil's very high interest rates would do little to dampen the ardour of foreign investors." The rise of the interest rate in relation to other countries in the world attracts capital that won't go to direct investment but rather to fixed-income funds with big returns, and the stock market, and that will have short-term effects on the exchange rate," Barbosa said.
Foreign investment in Brazilian stocks and bonds last year already hit a record $52 billion.
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