MercoPress. South Atlantic News Agency

Fearing overheated economy Brazil raises basic interest rate 50 points to 11.75%

Central bank President Alexandre Tombini

Brazil’s Central bank on Wednesday raised its benchmark overnight rate by a half-point for a second straight meeting to cool inflation that is approaching the upper limit of the government’s target range.

The bank’s policy committee, led by President Alexandre Tombini, voted unanimously, without a bias, to raise the Selic rate 50 basis points, or 0.5 percentage points to 11.75%.

“Following the process of adjustment of monetary conditions, the monetary policy committee decided, unanimously, to raise the rate to 11.75% a year, without a bias,” policy makers said in the statement announcing their decision.

Annual inflation in the 1.57 trillion US dollars economy has accelerated every month since August, prompting the bank to raise interest rates in January for the first time since July. The bank maintained the pace of rate increases as it counts on spending cuts and measures to slow credit growth to contain inflation running at a 26-month high, said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York.

“The inflation outlook is still worrying, but there are now signs that the credit measures enacted in December are having an effect,” said Rangel, who correctly forecast the half-point increase.

Total outstanding credit in the Brazilian economy expanded in January at its slowest pace in almost two years after the central bank raised reserve and capital requirements in December to prevent a credit bubble.

Outstanding loans rose 0.5% in January from December, the smallest increase since April 2009. December retail sales data were weaker than expected, showing an economy starting to cool, Rangel said.

The credit measures will have the same impact on inflation as a 0.75 percentage-point interest rate increase, according to the median estimate in a central bank survey published Feb. 24.

In the wake of the government’s macro-prudential measures and the announced budget plan, analysts covering the Brazilian economy cut their forecasts for 2011 economic growth to 4.3% this year down from 4.5% a week earlier, in a central bank survey published Feb. 28.