Dec. 15 (Bloomberg) -- Brazil's central bank raised its benchmark lending rate for a fourth time since September to stem inflation that has surged to a 10-month high.

Policy makers voted unanimously to lift the overnight interest rate half a percentage point to a 13-month high of 17.75 percent, matching the median forecast from a Bloomberg survey of 24 economists.

The decision may mark the end of increases before the bank starts cutting the benchmark rate next year to bolster the country's economic growth, said analysts such as Daniel Gleizer, a former central bank director. Gleizer said a seven-month, 18 percent rise in Brazil's real and a 20 percent drop in global oil prices since late October may limit inflation.

``These are two favorable factors,'' Gleizer, who heads risk management and economic research at Uniao de Bancos Brasileiros SA, Brazil's fifth-largest bank, said in an interview in Sao Paulo. ``The price of oil is always a point of concern that has moved favorably in recent weeks. The currency appreciation helps in price formation, reducing the cost of imports.''

Economists have cut their forecasts for inflation in two of the past three weekly surveys by the central bank. The median forecast for 2005 inflation in the bank's survey of about 100 economists dropped to 5.78 percent last week from 5.9 percent in the week of Nov. 19. The central bank targets inflation of 5.1 percent for 2005.

Cuts

``The bank will return to a cycle of interest rate cuts that would start in April,'' Paulo Vieira da Cunha, an economist with HSBC Securities Inc. in New York, said after the bank announced today's rate decision.

Inflation jumped to 7.2 percent in the 12 months through November, the highest rate since January, as rising consumer demand in South America's biggest economy gave companies more room to pass higher costs on to customers. Brazil's economy is expanding at its fastest pace in eight years after growing 6.1 percent in the third quarter from a year ago.

The central bank may keep raising the benchmark rate to as high as 20.25 percent because the nation's economic expansion is above the level of growth Brazil can have without sparking faster inflation, said Adam M. Weiner, who manages emerging-market bonds at OppenheimerFunds, said in an interview from New York.

Currency's Gains

``Brazil's non-inflationary level of growth is still between 3 to 4 percent,'' Weiner said. ``But growth is likely to be at a much faster level at year-end, close to 6 percent.''

A stronger Brazilian currency -- it has gained 6.1 percent against the dollar this year -- ``will, at the margin, still help the central bank to hike rates less than otherwise,'' Weiner said. The Brazilian real surged 1.5 percent today to 2.7255 to the dollar.

Lehman Brothers Holdings Inc., the most accurate forecaster of exchange rates in a Bloomberg survey last quarter, said the rally in emerging-market currencies will continue into the first half of 2005 and that the Brazilian real may be the best performer among them based on the firm's trading model.

Record deficits in the U.S. budget and current account, the broadest measure of international trade, will undermine demand for the U.S. currency in 2005 as they did in 2004 and boosting the value of emerging-market currencies against the U.S. dollar, Lehman said in a report last week.

Federal Reserve policy makers raised the benchmark U.S. interest rate a quarter point to 2.25 percent yesterday and restated a plan to carry out further increases at a ``measured'' pace to keep inflation in check. It was the fifth increase since June. Higher prices for raw materials, an improved jobs market and a weaker dollar all stoked inflation concerns this year.

Dollar Purchases

Brazil's central bank said it bought dollars in the local currency market twice last week and once this week to build up international reserves. The purchases prevented the real from strengthening beyond a 30-month high on Dec. 3, while not enough to weaken it beyond 2.8 per dollar, said Sergio Werlang, a former central bank chief economist who is a managing director at Banco Itau Holding Financeira SA.

``If the central bank hadn't intervened, the exchange rate would remain around 2.7 per dollar or stronger,'' Werlang, who expects the currency to end the year at 2.78 per dollar and next year at 2.85 per dollar, said in an interview in Sao Paulo last week. ``In view of global flows favoring other currencies, the dollar will continue to weaken.''

Werlang expects the Brazilian currency rally to prompt the central bank to stop raising interest rates after this month. Slower growth in industrial output adds to evidence that a benchmark rate at 17.75 percent will be enough to prevent the economy from growing faster than it's able to expand without quickening inflation, he said.

``The currency at the level it is will bring inflation expectations down,'' Werlang said. ``Plus the economy is already slowing down, as the latest industrial production figures show.''

Output

Brazil's industrial production slowed for a second month in October, rising 2.7 percent from a year earlier, compared with a revised 7.6 percent in September and 13.4 percent in August.

Newton Rosa, chief economist of Sul America Investimentos, which manages about 6 billion reais ($2.2 billion) of stocks and bonds, said economists will keep cutting inflation forecasts closer to the government's target in coming months, allowing the central bank to start lowering its benchmark interest rate as early as March. He expects the benchmark rate to end 2005 at 15.5 percent.

The central bank today also kept its ``neutral'' bias on future rate decisions, meaning bank President Henrique Meirelles would have to call a special board meeting to raise or cut rates before the next policy meeting, slated for Jan. 19.

To contact the reporter on this story: Carlos Caminada at ccaminada1@bloomberg.net

Last Updated: December 15, 2004 17:26 EST