The bank's monetary policy committee, Copom, voted unanimously to increase the so-called Selic rate to 12.25% from 11.75%, as expected. The hike came after a three-year run of lowering borrowing costs.
Brazil's economy grew 6.2% in last year's fourth quarter, more than twice the pace of the past decade and bank lending has almost doubled in the past three years. Inflation in Brazil climbed from an eight-year low of 3% in March 2007 to 5.25% through mid-May, above policy makers' 4.5% annual target for a fifth month.
The back to rate increases come at a time when Brazil has received two upgrades to investment grade from major credit ratings agencies, Fitch and Standard and Poor's, a recognition that many analysts expect to bring a flood of investment.
The real, Brazil's currency, has surged 19% in the past 12 months, the biggest gain among the 16 most-actively traded currencies versus the US dollar.
"Continuing the adjustment process of the benchmark interest rate, which was initiated at the April meeting, the Copom decided unanimously to raise the Selic rate to 12.25%," the bank said in the official statement.
Central Bank president Henrique Meirelles told the Brazilian Congress on May 28 that bank policy makers will act to prevent rising wholesale industrial and agricultural costs from spreading to consumers as household demand expands at a record pace.
A Central Bank survey of economists showed that the bank will raise interest rates to 13.75% by the end of the year. The latest half point increase pushes the real interest rate, which is the rate after adjusting for inflation to 7%, which is the highest among the world's leading economies.
The bank in October held the Selic rate at 11.25%, ending the longest cycle of cuts since Brazil adopted inflation targets in 1999.
Brazilian left-leaning President Luiz Inácio Lula da Silva and his predecessor conservative Fernando Henrique Cardoso bolstered investor confidence in Brazil by emphasizing the government's commitment to battling inflation.
Lula's moves to cut the budget deficit and allow the central bank to operate independently helped win Brazil an investment grade credit rating. Last week Lula da Silva ignored calls from his party to boost spending and instead ordered an US$ 8 billion budget cut.
Annual inflation in Brazil, which reached a record 4,922% in mid-1994 and averaged 400% a year between 1980 and 2007, fell below 10% for the first time in 1996.
Mercopress