Brazil lifts rate after nearly two years to tame prices

BRASILIA Wed Apr 17, 2013 7:36pm EDT

BRASILIA (Reuters) - Brazil raised interest rates for the first time in nearly two years on Wednesday, stepping up a battle against surging price increases that threaten to wreck an already weak recovery in Latin America's largest economy.

The central bank hiked its benchmark Selic rate to 7.50 percent from an all-time low of 7.25 percent. The move follows growing public uproar over rapid price increases for food staples and mounting political concerns as Brazil approaches a third year of lackluster growth in the runup to the 2014 presidential election.

Twenty-six out of the 58 economists surveyed by Reuters correctly expected the central bank to raise the Selic rate by 25 basis points. Market traders were betting on a steeper 50 basis points increase.

The decision by the bank's monetary policy committee, the first rate hike since July 2011, was not unanimous. Two of the bank's 8-member board, known as the Copom, voted to hold the rate steady.

The central bank's decision statement said that high inflation across a variety of goods and services made a monetary policy response necessary.

Still, the bank said it will remain cautious because of continuing economic uncertainty in Brazil and abroad.

"The committee considers that internal and mainly external uncertainties surround the prospective scenario for inflation and recommends that monetary policy be administered with caution," the bank said.

Price increases in recent months accelerated so much that inflation in March, at 6.59 percent, pierced the ceiling of the government's official tolerance band of 6.5 percent. The rising cost of groceries and other basics has fueled a popular uproar in a country that endured runaway inflation as recently as two decades ago.

Inflation is also complicating the political outlook for President Dilma Rousseff, who is relying on economic stability, if not dramatic growth, to help propel an expected bid for re-election next year. Though Rousseff still enjoys high approval ratings, political analysts say continued price increases or any further economic volatility could erode her support.

Central bank chief Alexandre Tombini faces a difficult balancing act. While rate hikes are needed to put a lid on price increases, he must keep them at a level that can still stoke growth in the sluggish economy.

High inflation has started to hit the real economy in a country where the leftist administrations of Rousseff and her predecessor, former President Luiz Inacio Lula da Silva, launched social policies that helped millions climb into the middle class, stoking inflation as Brazilians consumed more.

A decade-long boom fizzled in mid-2011 and a steady series of stimulus measures since is now threatened by the price increases. Retail sales fell unexpectedly in February as Brazilians kept some everyday food products off their grocery lists and officials worry that inflation could curb future investment.

The symbol of the recent woes is the tomato.

The price of the vegetable has soared more than 120 percent in value in a year and made the front page of local magazines and newspapers criticizing the government's failure to keep inflation in check. In some parts of Brazil, a kilo of tomatoes costs more than a kilo of meat.

(Reporting by Alonso Soto, editing by Paulo Prada, Theodore d'Afflisio and Andrew Hay)

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