Brazil expected to up key interest rate to 9pc

BRASïLIA: Brazil's Central Bank was expected Wednesday to raise its key interest rate by half a percentage point to nine percent in a bid to curb surging inflation, analysts said.

It would be the fourth consecutive increase this year as the real has depreciated against the dollar in a volatile market roiled by expectations of tighter US monetary policy.

Alex Agostini, chief economist at the Austin Rating agency, said Tuesday he expected the Bank's Monetary Policy Committee (Copom) to end its two-day meeting Wednesday by announcing a hike to nine percent.

"And for the end of the year, we think the rate will be at 10 percent," he added.

"The major concern is still the resistance of the inflation rate. For this reason, we believe that in 2014 the interest rate will be for a while in the double digits."

Among analysts of 33 financial institutions consulted by the economic daily Valor, 32 are forecasting a half percentage point hike to nine percent.

Market operators and analysts consulted by the Bank on a weekly basis concurred.

In July, 12-month inflation reached 6.27 percent, below but very close to the upper limit of the government target of 6.5 percent.

In addition to inflation, Copom is also concerned about the depreciating real, which has sunk to its lowest level against the dollar in four years.

This is due to expectations of tighter US monetary policy, including higher interest rates and a tapering of the Federal Reserve's $85 billion a month monetary easing.

Investors keen to capitalize on the surging dollar are withdrawing their assets from emerging markets such as Brazil, Russia and India.

"The depreciation has been very strong but there is also a context of high speculation," Agostini said.

Last week, the Brazilian currency plummeted to as low as 2.45 to the dollar, its lowest level since December 2008.

The Central Bank responded with an intervention strategy in which it pledged to offer $500 million a day in currency swap contracts from Monday through Thursday and $1 billion on Fridays.