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Brazil Lifts Selic to 10% on High Inflation, Low Confidence

Brazil’s central bank raised its key interest rate for a sixth time, extending the world’s biggest tightening cycle as a weaker currency and widening budget deficit spur inflation pressures.

The bank’s board, led by President Alexandre Tombini, voted 8-0 to raise the Selic today to 10 percent from 9.5 percent, as forecast by 50 of the 52 economists surveyed by Bloomberg. Two analysts predicted a 25 basis-point increase.

The decision sought to “give continuation to the adjustment of the benchmark rate that began in the April 2013 meeting,” policy makers said in their statement posted on the central bank’s website. Board members removed from the statement a phrase used after the previous decision saying the increase would ensure inflation’s continued slowing in 2014.

Brazil’s central bank has raised borrowing costs by 275 basis points since April as the real dropped the most among major currencies and deteriorating fiscal accounts sparked concern of a credit downgrade. Investor pessimism on Brazil’s economy means there is no room to let up on inflation, according to Enestor Dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria and the top Selic forecaster according to data compiled by Bloomberg.

“The burden is on the central bank’s shoulders,” Dos Santos said by phone before today’s decision. “The central bank is fighting to regain lost credibility. Inflation expectations for next year remain elevated.”

Swap rates on the contract maturing in January 2015, the most traded in Sao Paulo today, fell one basis point to 10.82 percent. The real fell 1.5 percent to 2.3305 per dollar, extending its decline this year to 12 percent.

Faster Inflation

Price increases in the 12 months through mid-November rose 5.78 percent, quickening from the month prior for the first time since mid-June, the national statistics agency said Nov. 19. Annual inflation has remained above the central bank’s 4.5 percent target for more than three years.

Policy makers have lifted borrowing costs by 50 basis points in each of the last five meetings, following a quarter-point increase in April. That totals one percentage point more than Indonesia and 2.25 percentage points more than Pakistan, the only other countries among 49 economies tracked by Bloomberg that have raised key rates this year.

Brazil’s consumer prices will ease below last year’s 5.84 percent while continuing to slow in 2014, Tombini told reporters in Washington on Oct. 11. Policy makers are committed to their inflation target, Tombini added.

‘Weaker Consumption’

Analysts tracking Brazil’s economy are less optimistic. They predict inflation will accelerate to 5.92 percent in 2014 from 5.82 percent this year, according to a central bank survey published Nov. 25.

Economists in the survey also predict growth will slow to 2.10 percent from 2.50 percent this year.

Third-quarter growth will contract 0.3 percent from the prior three-months, when the economy expanded by the fastest pace since 2010, according to 23 economists surveyed by Bloomberg. The national statistics agency will publish the official figure Dec. 3.

Inflation levels continue to hurt investment and personal consumption, according to Newton Rosa, chief economist at Sul America Investimentos.

Both Brazil’s retail sales and industrial production in September rose less than economists forecast. Total economic activity in September surprised analysts by contracting.

‘Additional Pressure’

Brazilian clothing retailer Marisa Lojas (AMAR3) is one company that has seen financial results sag. Its shares fell 2.6 percent on Nov. 19 after being cut to underperform from neutral by Bank of America Corp. (BAC) as a result of lower-than-expected third-quarter profits.

“Faster inflation affected consumer confidence,” Rosa said by phone before today’s decision. “This will end up leading to weaker consumption in the future.”

Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s (MCO) Investors Service last month lowered its outlook to stable from positive, citing deteriorating debt and investment ratios and evidence of slow growth.

An Oct. 31 report showed Brazil’s budget deficit widened to 3.3 percent of gross domestic product in the 12 months through September, more than analysts expected and the biggest since November 2009.

Government spending together with high service inflation and prospects of a fuel price increase prompted the central bank to maintain the pace of key rate increases, said Roberto Padovani, chief economist at Votorantim Ctvm Ltda.

“Brazil’s inflation is very high,” Padovani said by phone before the central bank announcement. “If the government does not give a sign that it will change the bias of fiscal policy, it could add additional pressure on the central bank.”

To contact the reporter on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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