Reuters: US Dollar Report: UPDATE 3-Brazil opts for steeper interest rate hike to curb inflation

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UPDATE 3-Brazil opts for steeper interest rate hike to curb inflation May 29th 2013, 23:59 Wed May 29, 2013 7:59pm EDT * Central bank raises Selic rate by 50 bps * Bold hike comes even after weak GDP print in Q1 By Alonso Soto BRASILIA, May 29 (Reuters) - Brazil's central bank raised its benchmark interest rate on Wednesday to 8 percent from 7.5 percent, stepping up the pace of a tightening cycle to battle high inflation even as Latin America's largest economy struggles with slow growth. The bank's monetary policy committee, known as Copom, voted unanimously to hike its Selic rate by 50 basis points, undeterred by disappointing first quarter growth. The decision comes as a surprise to most market traders who shifted their bets in favor a milder 25-basis-points hike after weaker-than-expected economic growth data earlier in the day. In a short statement, the bank said the "decision will contribute to lowering inflation and ensuring that the trend continues next year." The steeper hike could help the central bank and its chief Alexandre Tombini regain some of its lost credibility to fight inflation and ease high inflation expectations that some fear could halt much-needed investment and erode consumption. "Excellent, we welcome the move. It helps the central bank regain its credibility and anchor inflation expectations," said Alberto Ramos, economist with Goldman Sachs in New York. "Well done all across. Consistent message and unanimous decision." Brazil's economy fell short of forecasts once again in the first quarter, growing just 0.6 percent from the previous quarter. The weak data increased the likelihood of the third straight year of sub-par growth, underscoring Brazil's struggle to return to the boom years of the past decade. The GDP reading put added pressure on Tombini, who faces the difficult task of taming inflation without tripping up an economic rebound that is taking longer than expected to materialize. President Dilma Rousseff, a pragmatic leftist who is up for re-election next year, has sought to resurrect Brazil's economy with a flurry of stimulus packages, cheap credit and tax breaks for targeted industries. A prolonged tightening cycle, however, could make it harder for the economy to kick into higher gear. Link this Share this Digg this Email Reprints

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