MercoPress. South Atlantic News Agency

Brazil raises the basic rate to 12.50%, but confident it can tame inflation

Brazil’s central bank announced late Wednesday the fifth straight increase in its benchmark Selic rate by a quarter points to 12.5%, a decision much anticipated by the market and geared to combat high inflation, which is running at a six-year high, 6.75% above the government’s upper target of 6.5%.

Traders who correctly predicted the decision are split on whether policy makers will raise rates again next month. Yields on interest rate futures rose across the board yesterday, on increased optimism on outcome of the Euro-zone debt crisis.

Brazil's policymakers went into their meeting just hours after data showed inflation slowed sharply in the month to mid-July.

The Central bank Monetary Policy Committee, Copom, statement was noticeably shorter than that in the bank's previous meeting, saying only that the bank evaluated “the outlook and the balance of risks for inflation.”

That was in contrast to recent statements, including the June release in which the bank reiterated the need for a “prolonged” tightening cycle as part of its strategy.

Brazilian policymakers are trying to balance above-target inflation and the need to sustain economic growth.

The government is also gauging the effects of monetary policy on the currency, as higher interest rates will likely also feed a currency rally that has taken the Real near 12-year highs, which is a worry for exports.

Other emerging markets have faced the same dilemma. Some, such as economic powerhouses India and China, have tightened interest rates, as well.

In contrast, some developed markets, such as the United States, still have near-zero interest rates in a bid to boost economic expansion.

Brazil's benchmark IPCA price index rose 0.1% in the month to mid-July, less than expected and easing from 0.23% in the month to mid-June, data showed on Wednesday.

Nevertheless, the IPCA rose 6.75% in the 12 months to mid-July -- above the central bank target ceiling of 6.5%, first pierced in April this year.

Central bank president Alexander Tombini has repeatedly cited the “complexity” of the global economy as a reason why policy makers need to proceed with caution.

The Real rose to its strongest level since 1999 this month and has registered a 48% advance against the US dollar since the end of 2008.