Brazil opts for bold interest rate hike despite weak economy

BRASILIA: Brazil kept up an aggressive pace of monetary tightening 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 hike was part of an adjustment process that started in April, but added that the decision was taken at "this moment."

Previously the short statement had been interpreted as a sign that the bank was not yet ready to pause the tightening cycle, but the time element included in the language may be a hint that the bank could slow the pace of hikes ahead.

Until last week, market traders and economists were convinced the central bank was going to slow the pace of rate hikes to avoid scuttling the economy in an election year when President Dilma Rousseff is expected to seek a second term.

But 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.