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Brazil Answer to Fastest Growth in 2 Decades: Raising Interest Rates

Brazil's Central Bank chief Henrique Meirelles The chief of Brazil’s central bank, Henrique Meirelles, said he’s “confident” that Brazilian inflation will meet the target because the country has already started raising interest rates. He also admitted that Brazil is seeing “some decline” in exports to Europe as the region’s indebted nations struggle to cut budget deficits.

“We have at this point a solid track record in terms of keeping inflation on target,” Meirelles said in an interview with Bloomberg Televion. “We are confident that we will bring inflation to target.”

The central bank policy makers last month raised the benchmark interest rate, after keeping it at a record low for nine months, amid forecasts that Latin America’s biggest economy will expand at the fastest pace in two decades this year.

Meirelles, before raising the Selic rate to 9.5% from 8.75%, on April 25 said that it would take “vigorous action” by the central bank to bring consumer prices back to target. The national monetary council sets Brazil’s inflation target, currently 4.5% plus or minus two percentage points for this year and 2011. The council comprises the central bank president, finance minister and budget minister.

Inflation, as measured by the government’s benchmark IPCA-15 price index, rose 5.26% in the 12 months through mid-May, the highest rate in a year. Annual price increases have exceeded the government’s target in each month this year.

Brazil is strong enough to face financial turbulence “with serenity” because domestic consumption is driving growth and its debt to GDP ratio and nominal deficit are “low,” Meirelles said.

“This gives Brazil the conditions to confront the crisis with serenity,” he said. “But we’ve always warned the markets against excess optimism and against excess pessimism.”

In related news the national statistics office reported that Brazil’s unemployment rate fell more than forecast in April, to the lowest level for that month since 2001. Unemployment fell to 7.3% last month from 7.6% in March.

April’s jobless rate was the lowest outside the months of December and January, when companies hire temporary workers to meet demand by holiday shoppers, since the series began in 2001.

IMF Managing Director Dominique Strauss-Kahn said this week that Brazil’s growth could be as much as 7% this year, raising the risk of overheating. Economists forecast growth of 6.46%, according to the most recent central bank survey taken May 21.

Retail sales rose 15.7% in March from the same month in 2009, the fastest expansion since at least 2001, while industrial production expanded 19.7% in February.

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