January 21, 2015 / 11:47 AM / 5 years ago

UPDATE 3-Brazil hikes key rate again as central bank holds cards close

(Adds finance minister, analyst comments)

By Alonso Soto

BRASILIA, Jan 21 (Reuters) - Brazil hiked interest rates on Wednesday to maintain its aggressive pace of monetary tightening, leaving the door open for more rate hikes in an effort to arrest high inflation and regain the trust of investors.

In a widely expected move, the central bank’s eight-member monetary policy committee, known as Copom, voted unanimously to raise its benchmark Selic rate for the second straight meeting by 50 basis points to 12.25 percent, its highest level since August 2011.

The tightening cycle that began shortly after President Dilma Rousseff won re-election in October is at the forefront of a bold policy shift to rebuild the country’s fundamentals at a time of great uncertainty for emerging market economies.

In an unusually terse statement, the central bank did not give any hints of what it will do next.

“Considering the macroeconomic outlook and perspectives for inflation, Copom decided unanimously to raise the Selic rate by 0.50 percentage point,” said the bank, dropping language seen in its previous statement on Dec. 3 indicating that future tightening steps would be taken with “parsimony.”

During her first four years in office, Rousseff promised to bring some of the world’s highest interest rates down to single digits and keep them there.

However, a widening fiscal gap and the rapid pace of inflation has forced Brazil’s central bank to row against the current tide of monetary easing seen everywhere from Canada to Peru as the global economy staggers along.

The bank’s laconic statement was interpreted by some economists as a signal policymakers will continue raising rates to regain its inflation-fighting credentials despite fears that more tightening could push the economy into recession.

“The central bank wanted to reinforce the message that it will do whatever is necessary to bring inflation closer to the target in 2016,” said Mauricio Molan, chief economist with Santander Brasil.

“The central bank is hinting at another 50-basis-point hike at its next meeting,” he added.

The central bank has promised to do “whatever is necessary” to bring 12-month inflation back to the 4.5 percent midpoint of the bank’s official 2.5 percent to 6.5 percent target range by 2016.


Finance Minister Joaquim Levy acknowledged earlier at the World Economic Forum in Davos, Switzerland, that Brazil could see a quarter of economic contraction this year, but the government will not ease its austerity drive.

“We are putting the house back in order and that will bring back confidence,” Levy said in comments released by the Finance Ministry on its website.

The road to lower inflation will be a difficult one for Brazil’s central bank even as global commodity prices plunge.

Although the Rousseff administration plans big spending cuts this year, steep hikes in electricity rates and bus fares are expected to keep inflation well above the center of the target range.

A string of tax increases announced on Monday to plug the fiscal deficit will also keep pressure on inflation.

A combination of more public spending, food price shocks and a sharp depreciation of the Brazilian real has kept inflation high in the last four years, eroding investor and consumer confidence in an economy that grew an average of 4 percent a year in the previous decade. (Additional reporting by Asher Levine; editing by Chizu Nomiyama, G Crosse, Toby Chopra and Christian Plumb)

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