MercoPress. South Atlantic News Agency

Brazil central bank expected to raise interest rates this week for third time running

The benchmark Selic could climb to 12.25%, next Wednesday, despite risks of a recession this year. That would be the highest rate since August 2011.

Brazil's central bank is expected to raise interest rates for a third straight meeting this week to quell any doubts about its commitment to ending years of high inflation.

 According to a Reuters poll 42 of the 45 economists surveyed expect another 50 basis-point increase in the benchmark Selic rate next Wednesday, to 12.25%, despite risks of a recession this year. That would be the highest rate since August 2011. The remainder expect a smaller rate increase, to 12%.

Fighting inflation is a cornerstone of Brazil's recent shift in economic policy. The bank kept interest rates at record lows for years despite growing price pressures, but it has recently been pledging to do “whatever is necessary” to curb price increases.

Inflation has stood above the central bank's 4.5% target since August 2010, crimping investments and weighing on consumer confidence. The central bank has pledged to lower inflation toward its goal by 2016.

Economists diverged more clearly in early December about how fast the bank seemed willing to raise rates, especially after policymakers added the word “parsimony” to last meeting's post-decision statement. For many, that was a signal the bank was concerned about Brazil's economy, which slowed significantly last year and could fall into recession in 2015.

But the bank, led by Alexandre Tombini, has since then dropped any references to “parsimonious” rate hikes. Market consensus moved up as a result: the median market forecast points to another increase in March, to 12.50%, and many banks expect policymakers to jack up rates to as high as 13% later in the year, the highest since early 2009.

What will determine the total size of the rate increases will be the exchange rate, which could fuel inflation if it keeps weakening, and the budget cuts yet to be confirmed, probably in February.

The austerity needed to increase Brazil's primary budget surplus to 1.2% of GDP as planned by Finance Minister Joaquim Levy would probably help keep prices under control, reducing the need for rate increases.