MercoPress. South Atlantic News Agency

Fearing an Over-Heated Economy Brazil Hikes Basic Rate 75 Points to 9.5%

President Henrique Meirelles has applied “vigorous action” whenever needed to curb inflation

Central Bank of Brazil increased on Wednesday the benchmark interest rate for the first time in 19 months in an effort to cool an economy forecast to expand 6% this year, one of the highest rates in two decades.

The eight-member Monetary Policy Committee (COPOM) led by Central Bank of Brazil's President Henrique Meirelles voted unanimously to raise the SELIC by 75 basis points to 9.5%, from a record low 8.75%. In a one sentence statement the board said the decision gives “continuity to the process of adjusting monetary conditions to the economic outlook, so as to assure the convergence of inflation to the target trajectory.”

Brazil’s Central Bank is the first in Latin America to raise interest rates since the region began emerging from the global financial crisis. Economists surveyed by the Central Bank expect the 1.6 trillion US dollars economy to grow 6% with inflation above the government’s 4.5% target in 2010 and 2011. However, the Central Bank may be forced to raise rates by a total of 4 percentage points this year and next to prevent the already “red hot” economy from overheating, Morgan Stanley said in a report this week.

Policy makers will take “vigorous action” to curb inflation as the risk of an economic “over-heating” emerges, Meirelles said earlier this week.

In July 2008, the SELIC was raised by 75 basis points eight days after Meirelles told Brazilian senators the bank would act “vigorously”. The bank last raised rates September 10, 2008, days before Lehman Brothers Holdings Inc. filed for the biggest bankruptcy in U.S. history, ending a five-month cycle of increases that boosted the benchmark rate by 250 basis points.

Annual inflation in Brazil has been quickening for five months. Consumer prices, as measured by the IPCA-15 index, rose 5.22% in the 12 months through mid-April, more than a full percentage point gain since November and above the government’s 4.5% target, the national statistics agency said last week.

Brazilian companies and manufacturers “have been unable to satisfy domestic demand for consumption and investment goods” since the beginning of the year, Alfredo Coutino, director for Latin America at Moody’s Economy.com, said in a note to clients April 22.