Brazil's central bank faces growing concern on rate hikes

jueves 28 de mayo de 2015 15:55 GYT

By Silvio Cascione and Walter Brandimarte

BRASILIA/RIO DE JANEIRO May 28 (Reuters) - Brazil's central bank risks causing unnecessary damage to a struggling economy if it raises interest rates even more in coming weeks, a growing number of economists and business leaders warn.

Central bank chief Alexandre Tombini has already increased the benchmark Selic rate by 3.25 percentage points since October, taking it to a whopping 13.25 percent even though the economy is expected to shrink at least 1 percent this year.

Brazil's rate hike cycle, the most rigorous among major economies in 2015, is an effort to tamp down inflation, currently running at above 8 percent, and regain investor confidence after some of President Dilma Rousseff's leftist economic policies backfired.

Brazil's interest rates are already the highest among the world's 10 largest economies.

Recent comments by central bank officials have led financial markets to believe that Tombini and his board will raise the Selic by another 50 basis points when the board next meets on June 2-3. Some are pricing in additional increases at subsequent gatherings in July and September.

After overwhelmingly supporting Tombini's efforts in the last few months, economists from some of Brazil's leading banks have begun voicing misgivings.

In recent interviews with Reuters, several expressed concern that Tombini risks going too far given the weaknesses in Latin America's largest economy. Unemployment rose to a four-year high of 6.4 percent in April, data showed last week.

"Because of the recession, (inflationary) pressure is already very weak. In that sense, raising rates further is an exaggeration," said José Francisco de Lima Gonçalves, chief economist at Banco Fator, in Sao Paulo.   Continuación...