UPDATE 2-Brazil hikes interest rates fifth time, no sign of stopping

Wed Oct 9, 2013 8:56pm EDT

* Central bank raises benchmark rate to 9.5 pct from 9 pct
    * Economists see more tightening due to unchanged statement


    By Luciana Otoni and Bruno Federowski
    BRASILIA/SAO PAULO, Oct 9 (Reuters) - Brazil raised interest
rates for the fifth straight time on Wednesday and gave no
indication of backing off its battle with high inflation even as
Latin America's largest economy struggles to pick up speed.
    The central bank raised its benchmark Selic interest rate
 to 9.5 percent from 9.0 percent as expected by all
but two of the 65 economists polled by Reuters last week. 
    Several economists were surprised the central bank made no
changes to the statement accompanying its decision, suggesting
it could maintain the current pace of rate increases at its next
meeting in November. 
    "The central bank isn't giving any indication that it will
stop the monetary tightening," said Arnaldo Curvello, head of
asset management at brokerage Ativa Corretora in Sao Paulo.
    "Probably at the next meeting we will have another increase
of 50 basis points, but there are doubts in the market about
what comes afterwards," he said. 
    Before the meeting, most economists believed the Selic would
 end the year at 9.75 percent, according to a weekly central
bank poll released on Monday. 
    But a growing number of economists have started to bet that
interest rates could climb back into double digits next year to
ensure inflation expectations for 2014 and 2015 fall toward 4.5
percent, the center of the official target range.
    
    Consumer price data released earlier on Wednesday showed
12-month inflation eased in September for the third straight
month to 5.86 percent. But economists in the central bank's
survey see little room for inflation to slow further, projecting
a year-end rate of 5.82 percent in the central bank survey.
    Some analysts say the bank may need to raise rates to
between 11 and 12 percent to get inflation back to 4.5 percent. 
    That would be a major disappointment for President Dilma
Rousseff, who boasted last year that the days of high interest
rates in Brazil were over as the Selic fell to an all-time low
of 7.25 percent.
    Brazil's economy was slow to react, however, to the monetary
stimulus and has been stuck in a holding pattern of slow growth
in the past three years. At the same time, inflation has
remained stubbornly high, forcing the central bank to reverse
course and start raising interest rates again. Since April, the
bank has raised the Selic by 225 basis points.
    Some economists took the repeat of the terse language used
by the bank in its previous three decision statements as a
strong indication of another aggressive rate hike that could
take the Selic to 10 percent on Nov. 27.
    That scenario seemed more likely after central bank director
Carlos Hamilton Araujo said last week there was still "a lot of
work to be done" to battle inflation.
    Araujo, who is widely viewed as the most hawkish member of
the eight-member monetary policy committee, made the comments
after unveiling bank projections for inflation to remain above
4.5 percent until the third quarter of 2015.
    Still, the central bank headed by Alexandre Tombini has
suggested it sees the end of its rate-hiking cycle ahead, as a
slight rebound by Brazil's currency and the prospect of tighter
government spending contribute to easing price pressures.
    "We expected this to be the last rate hike in the cycle,"
said economist Tatiana Pinheiro of Santander Brasil following
the decision on Wednesday. "Now, with this statement, we will
likely see at least one more increase."