MercoPress. South Atlantic News Agency

Brazil central bank at a cross road: fosters growth or combats inflation

Dilma Rousseff is running for re-election next October and a slow economy is not encouraging

Analysts forecast Brazil's central bank will leave its benchmark interest rate unchanged at 11% this week, with the world's seventh-largest economy caught between rising inflation and sluggish growth. But given the persistence of inflation it should not come as a surprise if the monetary policy committee raises Selic to 11.25% after its two-day meeting this week.

Analysts surveyed in the weekly Central Bank Focus poll said the bank would likely leave the rate unchanged. The rate has been at 11 percent since early April, when the bank raised it 0.25 percentage points in the last of nine consecutive increases aimed at braking inflation.

Brazil registered annual inflation of 6.28% in April, up 0.67 points and dangerously close to the official maximum target of 6.5%.

In effect although economic activity is weak and that could lead the bank to leave the rate unchanged, the inflation situation is very worrying.

The decision comes at a delicate time, with President Dilma Rousseff seeking reelection in October.

Economic growth, after hitting 7.5% in 2010, slowed sharply over the next three years and came in at just 2.3% last year. The central bank is forecasting growth of 2% this year.

Consumption is a major engine of the 200-million population economy and when Dilma took office the bank sought to spur growth with a cycle of expansionary monetary policy, cutting the Selic to an all-time low of 7.25% over the course of a year. But in April 2013 the bank began raising the rate again when inflation started climbing.

The performance of the economy is also eroding Dilma's bid for re-election with a sustained drop in opinion polls, although still manageable. But her political allies are nervous and a “Come back” Lula campaign had to be aborted by the former president himself. Lula da Silva in the political mentor of Dilma.