Brazil hikes interest rates again to regain market confidence

BRASILIA Wed Aug 28, 2013 7:11pm EDT

A worker checks currency sheets during a media visit to the Casa da Moeda do Brazil (Brazilian Mint) in Rio de Janeiro, August 23, 2012. REUTERS/Sergio Moraes

A worker checks currency sheets during a media visit to the Casa da Moeda do Brazil (Brazilian Mint) in Rio de Janeiro, August 23, 2012.

Credit: Reuters/Sergio Moraes

BRASILIA (Reuters) - Brazil raised its benchmark interest rate to a 16-month high of 9 percent on Wednesday, maintaining the pace of monetary tightening to fight inflation and rebuild investors' confidence in Latin America's largest economy.

The central bank's monetary policy committee, known as Copom, decided unanimously for a third straight half percentage point rate hike to ease inflationary fears that have risen on the back of a plunge in the value of the local currency.

Forty-four of 46 economists polled by Reuters expected the bank to raise its Selic rate to 9 percent from 8.5 percent as part of a tightening cycle that started in April.

The central bank left the door open for more rate hikes by reiterating that the latest increase is part of an ongoing rate-adjustment process.

"Continuing the adjustment of the benchmark interest rate, Copom decided unanimously to raise the Selic rate to 9 percent," said the bank in its post-decision statement that repeated exactly the language of the last communique in July.

Monetary authorities from India to Indonesia are scrambling to offset the massive outflow of capital triggered by expectations of a withdrawal of stimulus in the United States and a stronger dollar. The exodus of investors have dragged down the value of currencies in most emerging-market nations, pushing inflation higher via pricier imports.

The stakes are even higher for Brazil where a mix of erratic policy that includes government intervention plus supply-side bottlenecks have severely hit investor confidence in the once-booming emerging-market nation.

Higher interest rates would help Brazil not only tame price increases, but also bolster investors' confidence, the International Monetary Fund said in a report about the South American nation published earlier on Wednesday.

The double-digit slump of the real had even prompted some market bets for a larger rate hike on Wednesday.

However, central bank President Alexandre Tombini threw cold water on those expectations by saying on August 19 that the steep rise in the yield of interest rate future contracts was excessive. The bank also launched a $60 billion intervention program to halt the plunge of the real, which has been one of the worst performing currencies in the world this year.

Adding to the uncertainty in global markets is a likely military strike by the United States and allies on the Syrian government, which is accused of using chemical weapons against civilians and rebels.

(Additional reporting by Luciana Otoni, Asher Levine and Silvio Cascione; Editing by Andrew Hay)

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