Brazil raises key interest rate

Shoaib Ur Rehman May 30, 2013

imageBRASILIA: Brazil's Central Bank hiked its key interest rate by 0.50 points to 8.0 percent to control rising inflation and some analysts said on Thursday that this looked like a bold move.

It was the second increase within a few weeks, making a total rise of 0.75 percentage points.

The bank's monetary policy panel said Wednesday's increase should rein in inflation “and help keep that trend on course into next year.”

Last month, the bank's monetary policy committee pushed the rate up by 0.25 points to 7.5 percent, the first increase since July 2011.

Experts were alarmed in March when it was confirmed that 12-month inflation reached 6.59 percent, above the official upper limit of 6.5 percent.

The government is banking on gross domestic product growth of over three percent this year, after a paltry 0.9-percent advance in 2012.

Analysts had been expecting an increase in the key interest rate but were divided over whether it would be quarter or half point. The latter was seen by some as bold and a surprise.

Felipe Queiroz of risk ratings agency Austin Rating said it showed the central bank was acting more firmly against inflation, which had always stayed within the target range set by the government but not hit the exact center.

Brazil has had one of the world's highest inflation rates as a legacy of its battle against hyperinflation in the 1980s.

With a wave of cuts that began in August 2011 ended and the interest rate at 12 percent, the Central Bank aimed for economic growth in a context of international crisis.

Therefore, Wednesday's decision by the central bank was keenly awaited, as market operators wanted to know if the thrust would be to control inflation or stimulate growth via lower interest rates.

On Wednesday the national statistics agency IBGE reported that GDP grew only 0.6 percent in the first quarter of 2013 compared to the previous quarter, and 1.9 percent compared to the same quarter of 2012.

This was below what had been expected by the market and the government, which was determined to stimulate growth with presidential elections just over a year away.

The figure meant that GDP was up 1.2 percent over the last 12 months.

Manuel Enriquez Garcia of the University of Sao Paulo said the interest rate hike was good, even though economic growth was slow, because it showed the central bank was operating independently and inflation was alarming.

The economy expanded 0.9 percent in 2012 compared to 2.7 percent in 2011 and 7.5 percent in 2010.

The small GDP increase announced Wednesday caused the real to fall 1.89 percent against the dollar, to 2.114 per greenback.

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