* Central bank raises Selic rate to 7.50 bps from 7.25 pct
* Decision was split, two of eight members voted to hold
* Bank's caution signals timid tightening cycle ahead
* Inflation hits economy, Rousseff's re-election chances
By Alonso Soto
BRASILIA, April 17 Brazil raised interest rates
for the first time in nearly two years on Wednesday, starting
what is expected to be a modest tightening cycle to counter
surging inflation that threatens to wreck a 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,
expected by most economists, follows growing public uproar over
rapid price increases and mounting political concerns as Brazil
approaches a third year of lackluster growth in the runup to the
2014 presidential election.
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
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 decision brings about the perspective for a much
shorter cycle than people were expecting and in slower steps,"
said Jankiel Santos, chief economist with Espirito Santo
Investment bank in Sao Paulo.
"The bank doesn't necessarily believe that a significant
deterioration has occurred that requires a strong response."
The rate hike follows price increases that pushed inflation
to 6.59 percent in March, piercing 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
Inflation is complicating the political outlook for
President Dilma Rousseff. She 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
Central bank chief Alexandre Tombini, under fire from
critics who say he was lax and let prices outrun policy
decisions, faces a difficult balancing act.
He quickly complied when Rousseff, after taking office in
2011, said the downturn offered an opportunity for Brazil to
bring its historically high rates more in line with those of
other major economies. With ten consecutive rate cuts, however,
While hikes are needed to put a lid on price increases,
Tombini must keep them at a level that can still stoke growth.
The bank's careful language and two dissident votes for a
rate hold signal a timid hike cycle ahead as policymakers worry
more aggressive increases in borrowing costs could derail the
weak recovery, analysts said.
"We expect a short hiking cycle of no more than 100bp-150bp
total (midpoint of 125bp) spread out over 3-4 Copom meetings,"
said Alberto Ramos, chief Latin American economist at Goldman
In its decision statement, the bank said "the Copom notes
that domestic and, principally, foreign uncertainties surround
the future outlook for inflation, suggesting that monetary
policy should be conducted with caution."
High inflation has already 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,
have succeeded because of popular social policies that helped
millions of poor Brazilians get in on a decade of steady growth.
The decade-long boom fizzled in mid-2011 and a steady series
of stimulus measures is now threatened by the price increases.
Retail sales fell unexpectedly in February as Brazilians kept
some everyday food products off their grocery lists. 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.
Rousseff has sought to ease inflation through means besides
interest rates, such as eliminating federal taxes on food
staples and slashing electricity charges. She has also promised
to lure billions of dollars to fix the infrastructure
bottlenecks that keep production costs high in Brazil.
At the same time, though, her government has continued to
spend heavily -- even relaxing fiscal rules long used to
calculate budget targets. The spending, by adding to overall
demand in an economy where the government plays an outsized role
in everything from purchasing to credit, helps push up prices.
The central bank, then, is left with most of the battle
Rousseff has said that any new cycle of higher rates would
be less dramatic than in the past. As recently as a decade ago,
a benchmark rate beyond 26 percent, the highest of any major
economy, was needed to keep prices in check in Brazil.
Tombini has acknowledged that future monetary cycles will be
shorter because the Brazilian economy is now less volatile. And
with growth this year predicted by some economists to be as low
as 2.6 percent, the bank is expected to keep rates as loose as
possible to keep fostering a recovery.
The bank's last tightening cycle started in January 2011 and
raised rates to 12.50 percent from 10.75 percent over seven
months. Previous cycles have been more aggressive, hiking rates
higher and at a faster pace.
The scope of this tightening cycle will be crucial to mold
inflation expectations in coming years.
Government officials have said they worry that if high
inflation expectations become entrenched, they could undermine
investment in an economy that risks entering a third year of
mediocre expansion. The Brazilian economy grew 0.9 percent last
year - a far cry from its red hot expansion of 7.5 percent in