Brazil set for another steep interest rate hike to curb inflation

miércoles 21 de enero de 2015 02:00 GYT

By Alonso Soto

BRASILIA Jan 21 (Reuters) - Brazil will likely keep its aggressive pace of interest rate increases on Wednesday to rein in surging prices despite growing fears the once-thriving economy could plunge into recession this year.

Forty-five out of 48 economists surveyed by Reuters expect a second straight 50 basis-point hike in the benchmark Selic rate to 12.25 percent, its highest since August 2011. The remainder expect a smaller 25 basis-point increase.

President Dilma Rousseff has vowed to lower above-target inflation in what would be a major policy shift during her second term in office to win back wary investors and jump-start the sluggish economy.

The central bank has also hardened its speech with promises to do "whatever is needed" to bring inflation back to the 4.5 percent center of the official target by 2016.

"We reckon the bank will hike the Selic to 12.25 percent, and deliver a statement that will leave it free to hike by either 25bps or 50bps in the following meeting," Mario Mesquita, a former central bank director and chief economist with Brasil Plural, said in a note to clients.

Although the Rousseff administration plans to cut spending to help the central bank, steep increases in electricity and bus fares are expected to push inflation to more than three-year highs in mid-January.

A string of tax increases announced on Monday to plug a widening fiscal deficit will also keep pressure on inflation, which last year nearly pierced the official target of between 2.5 and 6.5 percent.

A combination of rising public spending, food price shocks and a sharp depreciation of the Brazilian real has kept inflation high in the last four years, eroding the confidence of investors and consumers in an economy that grew an average of 4 percent a year in the past decade.

The Brazilian economy barely expanded last year and could fall into recession this year as already weak consumption and investment are threatened by possible water and energy rationing due to a prolonged drought. A growing corruption scandal engulfing state-run oil company Petrobras could also dent investment in other sectors of the economy.

The fiscal and monetary tightening are likely to further slow the economy, but policymakers have said the adjustment is needed to eliminate distortions and set the bases for a new period of rapid growth. (Reporting by Alonso Soto; Editing by Chizu Nomiyama)