MercoPress. South Atlantic News Agency

Fearing high inflation Brazil raises basic rate 50 basic points to 8%

Tombini said the bank will “do what is necessary, in a timely manner” to slow inflation.

Brazil's central bank raised its benchmark interest rate on Wednesday to 8% from 7.5%, as part of an effort to battle high inflation in an economy that keeps struggling with slow growth.

The bank's monetary policy committee, Copom, voted unanimously to hike its Selic rate by 50 basis points. The decision followed disappointing first quarter growth.

In a short statement, the bank said the “decision will contribute to lowering inflation and ensuring that the trend continues next year.”

The bank removed previous references to “caution” in future decisions, indicating that policymakers could continue to deliver aggressive rate hikes to stem a surge in prices.

The steeper hike could help the central bank and its chief Alexandre Tombini regain some of its lost credibility to fight inflation and ease high inflation expectations that some fear could halt much-needed investment and erode consumption.

Brazil is one of the few major world economies currently raising interest rates as strong demand, high production costs and infrastructure bottlenecks keep inflation closer to the upper end of an already high official target range.

Tombini had signalled he may step up the tightening cycle, dropping previous references to “cautious” rate hikes and instead adopting more incisive language, saying the central bank will “do what is necessary, in a timely manner” to slow inflation.

Brazil's economy fell short of forecasts once again in the first quarter, growing just 0.6% from the previous quarter. The weak data increased the likelihood of the third straight year of sub-par growth, underscoring Brazil's struggle to return to the boom years of the past decade.

The GDP reading put added pressure on Tombini, who faces the difficult task of taming inflation without undermining an economic rebound that is taking longer than expected to materialize.

The last time the central bank raised the Selic by half a percentage point was in January of 2011 when a newly inaugurated Rousseff raced to tame a surge in activity that led the economy to grow 7.5% the previous year.