MercoPress. South Atlantic News Agency

Brazil Central Bank raises basic rate to 16,75% .

Brazil's Central Bank raised this Wednesday the basic SELIC interest rate half a point from 16,15 to 16,75% with the purpose of lowering inflation expectations given the strong domestic demand and surging international oil prices.

Development, Industry and International Trade minister Luiz Fernando Furlan said the decision must be interpreted as "temporary" and "precautionary", and addressing the powerful industry and exporters lobbies recalled that "the government has mechanisms to soften the impact of higher interest rates".

Sao Paulo financial analysts said that the higher than expected rise showed the Central Bank fears the economy could expand faster than demand and absorb fuel prices hike, endangering 2005 inflation targets. Brazil recorded it highest economic growth in eight years in the second quarter of 2004.

The latest 2004 GDP growth estimates stood at 4,5%, with inflation over 7%, a couple of points above the original target. Percentages for 2005 are 3,6 and 5,8%.

Mr. Furlan admitted that the federal budget was drafted with an estimated 13% SELIC rate at the end of the year, "but economists are now talking of 17% and probably 15,5% in 2005".

However industrialists were not moved with Minister Furlan's arguments, "this is going to generate future capacity problems", indicated Carlos Eduardo Moreira Ferreira from one of Brazil's main industry associations.

The Central Bank had already raised the SELIC rate a modest 0,25% last September, the first time in nineteen months.

The current account surplus for this year is expected to reach 9,5 billion US dollars, and the trade surplus 32,5 billion US dollars. Direct foreign investment should reach 15 billion US dollars this year, according to Central Bank information based on weekly polls among the country's main businessmen and bankers.