April 17 (Bloomberg) -- Brazil's real climbed to a nine-year high after the central bank increased its benchmark lending rate more than economists expected in its first rate increase in three years, luring money to the country's fixed-income market.

The real rose 0.3 percent to 1.6577 per dollar at 3:15 p.m. New York time, from 1.6619 yesterday. Earlier it touched 1.6530, its strongest since May 1999. The real has gained about 23 percent over the past 12 months, the best performance among the 16 most-traded currencies tracked by Bloomberg.

Central bankers raised the benchmark Selic interest rate half a percentage point yesterday to 11.75 percent in a bid to stem a pickup in inflation. Only 10 of 47 economists surveyed by Bloomberg News predicted an increase that big.

An aggressive monetary-policy tightening cycle this year will bolster investment flows even more, pushing the real to as strong as 1.4 per dollar by the end of the year, said Paulo Tenani, head of Latin America research at UBS Pactual in Sao Paulo.

``If the central bank continues to raise rates, and nothing else is done in terms of policies to slow the currency rally, the real is on track for a very strong appreciation,'' Tenani said, adding UBS's official forecast is for a 1.6-per-dollar exchange rate by year-end. The Swiss bank expects central bankers in Brazil to add 250 basis points, or 2.50 percentage points, to the rate by the end of the year.

The real has gained 1.7 percent since April 15 on expectations that the central bank could opt for a bigger-than- forecast interest-rate increase, said Luiz Adriano Martinez, portfolio manager at Unibanco Asset Management, which has 44 billion reais ($26.5 billion) in assets.

`Best Bets'

``With this credit-tightening cycle, the real will benefit from more flows, but it doesn't really alter investment strategies because the currency was already one of the best bets in the world,'' Martinez said.

Some investors voiced concern that higher credit costs will have a negative impact on economic growth. Yesterday's increase was unnecessary in the fight against inflation and may curb the country's economic growth, said Alfredo Coutino, senior economist for Latin America at Moody's Economy.com Inc., one of two economists in a Bloomberg survey who called for the maintenance of the Selic at 11.25 percent.

``Brazil's central bank is panicking on inflation,'' Coutino said by telephone from West Chester, Pennsylvania. ``We don't have a real inflation problem in Brazil, nor a significant inflation rebound.''

Annual consumer prices as measured by the government's IPCA index jumped to 4.73 percent in March from an eight-year low of 3 percent in March 2007. The central bank targets inflation at 4.5 percent, give or take 2 percentage points.

The yield on Brazil's zero-coupon bond due in January 2010 fell 3 basis points to 13.41 percent, according to Banco Bradesco SA. The yield on the security rose about 10 basis points in the first three days of this week.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

Last Updated: April 17, 2008 15:17 EDT