Inflation Fear Leads Brazil Central Bank to Raise Interest Rates by Steep 0.75%

Brazil Central Bank's headquarters The central bank of Brazil raised interest rates by 0.75% to 13% on Wednesday, July 23, lifting borrowing costs for the third time in four months in a bid to prevent resurgent inflation from undermining economic growth.

The bank's monetary policy committee, Copom, voted unanimously for the increase. In April and June Copom lifted the basic Selic rate by 50 basis points.

In a brief statement, the committee said it opted for a steeper rate increase this time to push "inflation toward the target in a timely manner."

With consumer prices climbing at the fastest pace in almost three years, Brazilian officials have repeatedly sought to talk down inflation expectations in recent weeks by stressing that the government is committed to stabilizing prices.

The benchmark IPCA consumer price index, which the central bank uses as a guide when setting rates, slowed unexpectedly in June from May, but on an annual basis inflation rose at the fastest clip since November 2005.

Even with interest rates on the rise, most economists are now betting that inflation might overshoot the government's year-end target for the first time since 2003. Brazil has an annual inflation target of 4.5% with a tolerance band of 2 percentage points.

A central bank survey of local financial institutions this week showed that the market expects the IPCA to rise 6.53% in 2008, just surpassing the ceiling of the target.

Brazil Central bank president, Henrique Meirelles, was recently quoted by the Financial Times saying that inflation was the greatest threat to the Brazilian and global economies and called on other central bankers to concentrate more attention on inflation than on the risk of recession. He has since spoken of the need to "act vigorously" to keep inflation in check.

However, Meirelles and other ministers have admitted that monetary policy alone cannot overcome inflationary pressures and that there is a need for tighter fiscal policy to curb overall demand by cutting government spending.




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