(Adds analyst comment and context)
By Alonso Soto
BRASILIA, Dec 3 (Reuters) - Brazil raised its key interest rate on Wednesday to a three year high, accelerating monetary tightening in a bold move to quell inflation and reinforce President Dilma Rousseff’s shift toward more business-friendly policies.
In a unanimous vote, the central bank’s monetary policy committee raised its benchmark Selic rate by 50 basis points to 11.75 percent, its highest since August 2011.
The size of the rate increase surprised many analysts who had expected the bank to opt for a second straight 25-basis-point hike to lower inflation that remains above the 6.5 percent ceiling of the official target.
Still, the central bank signaled in its statement that it could slow the pace of tightening at coming meetings given the lagging effects of past rate increases.
“Considering the accumulative and trailing effects of monetary policy, among other factors, the committee finds that additional monetary policy efforts should be implemented sparingly,” the central bank said in its statement.
Rousseff has vowed to adopt more market-friendly policies to turn around an economy that has expanded just two percent a year since she took office in 2011, or less than half the average of the prior decade.
Her incoming finance minister, Joaquim Levy, has promised to rein in spending to restore public coffers depleted after years of high government outlays and dozens of controversial tax breaks.
Central bank chief Alexandre Tombini has said fiscal restraint is key to help monetary policy bring inflation back to the official target and lift slumping business and consumer confidence.
“This hike is an important step to reinforce the shift in economic policies in a second term and complements the gradual fiscal tightening announced by the new team,” said Eduardo Velho, chief economist with Invx Global Partners.
The first sign of a policy shift came from the bank itself. On Oct. 29 it surprised investors with a 25 basis-point rate hike after holding the Selic steady for three meetings.
The Rousseff administration’s fiscal largess has stoked inflation and raised the risk that the country could lose its coveted investment grade in coming years as its debt surges. Earlier this year Standard & Poor’s downgraded Brazil to just a notch above junk status.
In a letter to investors released on Wednesday, Rousseff gave the clearest backing yet to Levy by stressing the need to put fiscal accounts back in order.
Some doubt the leftist leader, who is a trained economist and likes to make financial decisions, will be able to keep her promises of fiscal discipline.
Her government on Wednesday approved the release of 30 billion reais ($11.7 billion) to state development bank BNDES, in a move that has been widely criticized by analysts in the past for raising the country’s gross debt without stimulating the economy.
In his first public comments last week, Levy said that the government will limit transfers to the BNDES and clean up its finances to rebuild confidence. (1 US dollar = 2.5515 Brazilian real) (Additional reporting by Luciana Otoni; editing by Jeb Blount, Andrew Hay, Meredith Mazzilli and Diane Craft)