Brazil Raises Rate to 13.75%, Highest in Two Years

By Joshua Goodman and Andre Soliani

Sept. 10 (Bloomberg) -- Brazil's central bank raised its benchmark interest rate to the highest in almost two years in a bid to cool accelerating economic growth that's stoking inflation. Policy makers were split over the size of the move for the first time in over a year.

Policy makers led by Henrique Meirelles voted 5-3, without a bias, to increase the so-called Selic rate to 13.75 percent from 13 percent, as forecast by 40 of 41 economists in a Bloomberg survey. That raised the country's real interest rate, which is the Selic minus inflation, to the highest of all 54 countries tracked by Bloomberg.

The central bank, in a statement, said it was raising rates ``to promote the conversion of the inflation to the target trajectory in a timely fashion.''

It was the first non-unanimous vote since July, 2007, with dissenters favoring a 50 basis-point increase, as forecast by one economist in the same survey.

Falling commodity prices that pushed inflation lower last month to 6.17 percent, from a three-year high of 6.37 percent, have done little to ease central bank concerns that demand growth is outpacing supply in Brazil's $1.3 trillion economy.

Economic growth unexpectedly accelerated to 6.1 percent in the second quarter, a government report showed today, fueling concern that rising demand may stoke inflation. Consumer price increases have exceeded the bank's 4.5 percent target since January.

More Rate Increases

Policy makers, after raising the so-called Selic rate by a larger-than-expected 0.75 percentage point in the previous meeting July 23, used the same language to express their goal of bringing inflation back to its target in a ``timely fashion.''

Central bankers will raise the Selic rate further to 14.75 percent by the end of the year, according to the most recent central bank survey of 100 economists published Sept 5.

The second-quarter gross domestic product expansion, up from 5.9 percent in the previous three months, beat all forecasts in a Bloomberg survey of 36 economists, whose median estimate was 5.5 percent.

Central bank President Meirelles described the GDP advance as ``robust,'' driven by a record 5.4 percent increase in investments on a quarter-on-quarter basis, according to a statement distributed in Brasilia.

``Brazil lives today a sustained growth cycle, supported by price stability,'' Meirelles said.

Spending

Government plans to boost spending excluding interest payments by 13 percent in 2009 are also adding pressure on inflation, said Thomas Trebat, director of Columbia University's Center for Brazilian Studies in New York.

Manufacturers operated at a record 83.5 percent capacity in July and industrial output grew 8.5 percent that month, more than economists expected.

Finance Minister Guido Mantega said today in Brasilia economic growth isn't stoking inflation. Growth this year will exceed the government's 5 percent forecast, he said.

``The economy can grow at a pace of 5 percent to 5.5 percent keeping inflation within the target,'' Mantega told reporters. ``The increase of GDP comes as inflation is slowing and therefore growth is sustainable.''

The central bank started to raise the Selic rate at the April 15-16 meeting after holding it unchanged for six months at a record low of 11.25 percent. Policy makers had increased the rate by half a percentage point twice before accelerating the pace in July. Today's rate increase puts the Selic rate at the level it was in November 2006.

Brazil's real fell today to the lowest level in seven months and yesterday Mantega predicted further weakening because of reduced investment and a narrowing trade surplus. The real is down 8.7 percent this month, the worst performance among the 16 most-traded currencies tracked by Bloomberg.

Inflation Peak

Economists began trimming their inflation forecasts in August after consumer prices rose at the slowest pace in 11 months. Citigroup Inc. said in a report yesterday that inflation ``likely peaked'' in July at 6.37 percent. Consumer price increases will slow to 6.27 percent by the end of 2008, according to the central bank weekly survey.

Parts of the economy are showing signs of slowing following the central bank's rate increases. Vehicle sales grew 4 percent in August from a year ago, the slowest pace in almost two years, after car-loan costs jumped.

To contact the reporters on this story: Joshua Goodman in Rio de Janeiro at Jgoodman19@bloomberg.net; Andre Soliani in Brasilia at at soliani@bloomberg.net