June 4, 2015 / 12:05 AM / 5 years ago

UPDATE 3-Brazil raises interest rates again, signals more hikes

(Adds Moody’s comment on debt and context)

By Alonso Soto

BRASILIA, June 3 (Reuters) - Brazil raised interest rates to the highest levels in more than six years on Wednesday, extending a tightening campaign and leaving the door open for more hikes despite concerns that steep borrowing costs could deepen an expected economic recession.

The central bank’s monetary policy committee, known as Copom, decided unanimously to hike its benchmark Selic rate by 50 basis points to 13.75 percent as expected by an overwhelming majority of market players. It is the highest Selic rate since January 2009.

Leading one of the world’s boldest rate-hiking cycles to tame inflation running at an 11-year high, the central bank is succeeding in regaining credibility with investors but risks damaging an economy expected to suffer its worst recession in 25 years.

The bank signaled it may further increase rates to make good on its promise to bring inflation back to the 4.5 percent center of the official target range by late 2016.

In the decision statement, the bank repeated the same laconic message released in its previous one, leaving analysts guessing.

“It is the right decision and another step to rebuild policy credibility,” said Alberto Ramos, senior economist with Goldman Sachs in New York. “We are coming relatively close to the end of the cycle, but the exchange rate and activity will determine whether we need one or two more hikes.”

In just over six months, the bank has raised rates a whopping 275 basis points to bring down inflation expectations that at 5.50 percent remain well above the target for next year. Although expectations for 2017 until 2019 have dropped steadily, the bank is most likely to halt the cycle once views for 2016 inch closer to 4.5 percent.

The bank is under pressure from businessmen, politicians and even government peers to halt the increases that threaten to weigh on an economy already suffering with scarce investment.

Some economists and even rating agency analysts have started to warn that the sharp increase in rates could hamper Finance Minister Joaquim Levy’s efforts to slash spending to bring down high debt levels.

Moody’s Investors Service said on Wednesday that higher interest rates will likely keep Brazil’s gross debt ratio above 60 percent in coming years, hurting its investment rating profile.

The Brazilian economy is forecast to contract 1.3 percent this year as investment sinks and business confidence remains at record lows, according to the latest central bank poll of economists. (Reporting by Alonso Soto, Editing by Diane Craft)

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