Brazil’s Central Bank has increased its key interest rate to 11.25% in the hope of halting inflation. The rate has gone up from 10.75% and is the first under the Government of President Vilma Rousseff, who came in to office earlier this month.
Inflation last year was 5.91% and is expected to remain above 5% this year. The Brazilian economy is one of the fastest growing in the world.
The Central Bank has said that the rise could be the first of measures to curb inflation. The Central Bank has said it will do what is necessary to control prices. However, it is at the risk of attracting foreign money, adding pressure to the already overvalued Real. Capital inflows from outside Brazil have climbed as investors escape from record low rates in developed countries.
The President of the Central Bank Alexandre Tombini is under pressure to show investors that they can take harsh measures to contain prices.
The strengthening of the Real has hit Brazil’s manufacturers hard because their exports have become more expensive but the country needs to do more to restrict a massive consumer credit boom, which has helped push the economy’s rapid growth.
Brazil is Latin America’s largest economy and grew more than 7% in 2010 and is expected to grow by between 4.5% and 5% this year.