* Central bank increases Selic 50 bps to 10.50 pct
* Most economists expected a moderate 25 bps rate hike
* Bank signals may slow pace of hikes at next meeting
By Alonso Soto
BRASILIA, Jan 15 Brazil surprised economists by
maintaining an aggressive pace of interest rate hikes on
Wednesday to head off a surge in inflation, even as Latin
America's largest economy struggles to gain momentum.
The central bank's monetary policy committee, known as
Copom, voted unanimously to raise the so-called Selic rate
to 10.50 percent from 10 percent - its highest in
two years. Only 14 out of 44 economists polled by Reuters
expected the bank to raise rates by 50 basis points. A majority
of market traders predicted the bolder rate increase, which
marked the bank's seventh straight hike.
The bank slightly changed its decision statement,
reiterating that the rate increase was part of an adjustment
process that started in April, but added that the decision was
taken at "this moment."
The phrase reinforces the bank's previous guidance that it
may slow the pace of rate hikes or even end one of the world's
most aggressive monetary tightening cycles, economists say.
"The bank is telegraphing that they will slow the pace to 25
bps at next meeting or even interrupt the cycle," said Alberto
Ramos, head of Latin America economic research for Goldman
Until last week, market traders and economists were
convinced the central bank was going to slow reduce the size of
rate hikes to avoid scuttling the economy in an election year
when President Dilma Rousseff is expected to seek a second term.
A surprise surge in prices in December that took the
12-month inflation rate close to 6 percent changed the minds of
many market players who believed the bank needed to send a
strong signal it is serious about bringing inflation closer to
the 4.5 percent center of the target range.
Since last April, the central bank has raised the Selic rate
by 325 basis points, starting with a 25 basis point increase,
followed by six straight hikes of 50 basis points.
The aggressive tightening cycle has so far done little to
ease inflation, which has remained under pressure from a weaker
local currency and heavy government spending.
Central bank president Alexandre Tombini will face another
tough choice when the monetary policy committee meets next in
February. An eighth straight rate hike should help drive down
inflation, but the bank will be under pressure to halt the
tightening cycle to avoid undermining the economy further.
"I don't even think the central bank knows for certain what
it will do next," said Zeina Latif, chief economist with XP
Investimentos. "Although the bank recognizes that there are
limits to the rate-hiking process, it sent the right signal
after inflation rose above expectations last year."
The bank has vowed to "keep an eye" on inflation, but also
remained non-committal by warning that currency volatility could
hamper the effects of monetary policy on inflation.
Wednesday's half-point increase means economists are likely
to revise upwards their forecasts for the Selic rate by year
end, possibly taking them to around 11 percent. That is well
above the "single digits" Rousseff promised at the start of her
High inflation could be a big political liability for
Rousseff this year. A rapid increase in prices has already
dented domestic consumption, which is the country's main growth
engine and has underpinned the president's popularity.
The Brazilian economy contracted 0.5 percent in the third
quarter of 2013 from the previous quarter as investment dropped
sharply. Recent data points to a feeble recovery in the fourth
quarter and subdued activity at the start of 2014.
Three years of subpar economic growth have increased market
pessimism but not yet hurt Rousseff's popularity as unemployment
remains near record lows and wages keep rising. The left-leaning
economist is the clear favorite to win a second term in the
general election in October, according to recent polls.
Repeated government intervention in the economy and lax
fiscal policies under Rousseff have raised doubts among
investors that Brazil can return to the robust growth rates of
the past decade. The Brazilian economy likely grew just above 2
percent in 2013 and private economists predict it will expand
even less this year.
Brazil is struggling at a time when the global economy is
starting to pick up as the United States and Europe slowly
emerge from a string of financial and debt crises.
Some economists have even grouped Brazil in the so-called
"fragile five" economies along with India, Indonesia, South
Africa and Turkey. Those countries are seen to be especially
vulnerable to a sudden flight of capital resulting from the
withdrawal of U.S. monetary stimulus.
What's more, Standard & Poor's has warned it may cut
Brazil's debt rating this year if public finances keep
deteriorating and the economy fails to pick up speed.
Despite the weak economy, inflation in Brazil has remained
well above the center of the official target range of between
2.5 percent and 6.5 percent. The central bank's own forecasts
put inflation above 5 percent through 2016.