Brazil's central bank boosted the benchmark lending rate for a ninth straight month in a bid to reverse a surge in consumer prices that has sent the annual inflation rate to a 16-month high.

Policy makers led by bank President Henrique Meirelles voted unanimously to raise the overnight interbank rate to 19.75 percent from 19.5 percent. Economists in a Bloomberg survey were split on the rate outlook ahead of the meeting, with 19 forecasting the bank would hold the rate at 19.5 percent and 18 forecasting an increase.

"There are still too many uncertainties over the near term inflation scenario and so they've decided to err on the side of caution with another hike,'' Nuno Camara, a Latin America economist at Dresdner Kleinwort Wasserstein, said in a telephone interview from New York. “e are very, very near the end of the tightening cycle but another rate increase is a possibility next month.''

The pickup in inflation this year in South America's biggest economy has been fueled by rises in electricity rates, food and medicine that economists say are one-off increases. By raising rates again today, the central bank is seeking to prevent those one-off increases from sparking other price rises throughout the economy, said Gray Newman, chief Latin America economist at Morgan Stanley in New York.

"These one-off hikes could trigger a new round of copycat inflation and that's what I think the central bank is concerned about and wants to respond to,'' Newman said in a telephone interview before the central bank's announcement. He had forecast a rate increase.

Inflation Surge

Brazil's annual inflation rate jumped to 8.1 percent in April, the highest since December 2003, from 7.5 percent in March. The inflation rate is 3 percentage points above the central bank's 5.1 percent target for the year. Economists in the central bank's weekly survey predict inflation will ease, with the annual rate declining to 6.4 percent by year-end.

The economy is showing signs of slowing under the strain of rising borrowing costs: Industrial output grew at its slowest pace in 16 months in March - 1.7 percent - while Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the country's biggest retailer, said same-store sales fell 1.3 percent in April.

Brazil's economic growth rate will drop to 3.5 percent this year from 5.2 percent in 2004, which was the highest in a decade, according to the median forecast from a weekly central bank survey of about 100 economists.

Interest-rate future contracts showed traders were also split ahead of the meeting on whether the central bank would raise the benchmark rate. The yield on the overnight loan contract for delivery in June traded in Sao Paulo at 19.58 percent, 8 basis points, or 0.08 percentage point, above the current overnight rate, at 5 p.m. New York time. Brazil's currency gained for the first day in five today, rising 1 percent to 2.457 reais to the dollar."

(From Bloomberg, May 18, 2005)
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