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Brazil Says Correct to Carry on Half-Point Rate Increases

Brazil’s central bank said it’s appropriate to carry on with half-point interest rate increases in a bid to ensure inflation won’t hurt demand and investments.

The bank’s board, led by President Alexandre Tombini, voted unanimously last week to boost the benchmark Selic rate by 50 basis points for the second straight time. The Selic has been lifted in each of the past three meetings to 8.50 percent from a record low 7.25 percent in March.

Tombini has carried out this year the world’s biggest interest rate increase amid major economies as the fastest inflation in 20 months saps growth. More than 1 million Brazilians took to the streets last month as the cost of living surged and growth remained slow. Policy makers said today the persistence of above-target inflation would hurt the economy.

The monetary policy committee “considers appropriate to continue the current pace of the monetary policy adjustment,” central bankers said in the minutes of their July 9-10 meeting published today.

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose seven basis points, or 0.07 percentage point, to 9.43 percent at 10:04 a.m. local time. The real fell 0.5 percent to 2.2376 per U.S. dollar.

’Relatively Aggressive’

The current pace of interest rate increases is “relatively aggressive” to ease inflationary pressures and reduce the pass-through of a weaker currency to consumer prices, Luciano Rostagno, chief strategist at Banco WestLB do Brasil, said by phone from Sao Paulo.

Rostagno expects policy makers to raise the key rate by 125 basis points through the end of the year.

The real has dropped 9 percent in the past two months, the worst performance among the 16 most traded currencies tracked by Bloomberg. The central bank said the currency depreciation will be a source of inflationary pressure in the short term that can be mitigated with an adequate monetary policy.

Brazil’s inflation in June accelerated to 6.70 percent, the national statistics agency said earlier this month. That compares with 6.50 percent in May, and marks the fastest increase pace October 2011.

Close to Zero

Monthly inflation in July will be close to zero, President Dilma Rousseff said on July 17, adding that price increases will slow to the central bank’s tolerance range by the end of the year. Policy makers target inflation at 4.5 percent, plus or minus two percentage points.

The central bank said the short-term risk for inflation is currently low and will help monetary policy reduce expectations for consumer price increases.

Consumer confidence fell 3.5 percent in June from the previous month to its lowest level this year, according to an index published by the National Industry Confederation. Retail sales in May were unchanged from the previous month after climbing at half the pace forecast by analysts in April.

Brazil’s economy expanded 0.55 percent in the first three months of this year, compared with 0.64 percent in the fourth quarter of 2012. Analysts covering Brazil have reduced their 2013 growth forecast for nine straight weeks to 2.31 percent, according to a July 12 central bank survey of about 100 economists.

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