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UPDATE 2-Brazil delivers another steep interest rate hike to tame prices
July 10, 2013 / 2:36 PM / in 4 years

UPDATE 2-Brazil delivers another steep interest rate hike to tame prices

* Central bank hikes Selic by 50 bps as expected

* Bank says hike to help lower inflation through next year

* Currency, fiscal discipline key in tightening cycle

By Alonso Soto

BRASILIA, July 10 (Reuters) - Brazil raised its benchmark interest rate to 8.50 percent from 8 percent on Wednesday, maintaining the pace of monetary tightening to battle above-target inflation in Latin America’s largest economy.

The central bank’s monetary policy committee voted unanimously to hike its Selic rate by 50 basis points, a move widely expected by markets.

Under the leadership of Alexandre Tombini the central bank has hiked rates three consecutive times this year in a bid to regain its credibility as an inflation fighter and curb prices, which in June rose at their fastest pace in 20 months.

“The Committee understands that this decision will contribute to lowering inflation and ensuring that the trend continues next year,” the central bank said in a statement, repeating the same language used in the previous decision.

A sharp depreciation of the real, which increases the value of imports, poses a serious challenge for the central bank, which has pledged to bring inflation below the 5.84 percent mark recorded last year.

High inflation has already started to erode Brazilians’ purchasing power, threatening the popularity of President Dilma Rousseff who is trying to appease a nationwide movement against poor public services and corruption sparked by a hike in bus fares last month.

Rousseff, who is widely expected to run for re-election next year, has promised to increase investment in public services but at the same time maintain fiscal discipline to regain the confidence of investors after two years of subpar growth.

In a nod to the central bank, the administration has said it is putting the final touches in a budget cut of up to 15 billion reais ($6.63 billion).

Fiscal prudence and the exchange rate level will be key to determine how far the central bank will go in the current tightening cycle, which some economists say could bring the Selic back to double digit levels.

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