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Brazil signals pause in rate-tightening cycle

A woman shops at the the Municipal Market in Sao Paulo.


Brazil's central bank signalled a possible pause in its tightening cycle on Thursday as it raised its benchmark interest rate for a fifth straight time to fight stubbornly high inflation.

The bank's monetary policy committee, known as Copom, voted unanimously to raise the Selic rate by 25 basis points from 12.25 per cent in a widely expected move.

Brazil's policy makers went into their meeting just hours after data showed inflation slowed sharply in the month to mid-July.

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The Copom statement was noticeably shorter than that in the bank's previous meeting, noting only that the bank evaluated "the outlook and the balance of risks for inflation."

In South America, Chile and Peru both recently paused their rate hike cycles. Analysts say rates throughout the region could be nearing a plateau.

"The central bank opened the door to stop raising interest rates, beginning with the next Copom meeting in August," said Roberto Padovani, the chief strategist for WestLB in Sao Paulo. "They are saying today it makes sense to raise rates, but we don't know about tomorrow."

All 21 analysts who took part in a Reuters poll predicted a hike to 12.5 per cent.

Brazilian policy makers are trying to balance above-target inflation and the need to sustain economic growth.

Other emerging markets have faced the same dilemma. Some, such as economic powerhouses India and China, have tightened interest rates, as well.

In contrast, some developed markets, such as the United States, still have near-zero interest rates in a bid to boost economic expansion.

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Brazil's benchmark IPCA price index rose a less-than-expected 0.1 per cent in the month to mid July, easing from 0.23 per cent in the month to mid-June, data showed on Wednesday.

Nevertheless, the IPCA rose 6.75 per cent in the 12 months to mid-July - above the central bank target ceiling of 6.5 per cent, first pierced in April this year.

Brazil's high inflation rate is not just a problem for the central bank, but also for President Dilma Rousseff. Her political base draws heavily from middle- and lower-income classes - people particularly hurt by sharp inflation.

Those voters also feel interest rate increases keenly, since higher borrowing costs cut into their ability to buy big-ticket items such as household appliances and cars.

Last year Latin America's biggest economy grew 7.5 per cent. Growth will likely slow to around 4 per cent this year.

Steeply higher interest rates could derail that growth by keeping companies from borrowing to fund and expand activities. Higher interest rates would also feed a currency rally that's taken the real near 12-year highs, a worry for exports.

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Instead, the central bank has emphasized a gradualist approach, playing the tortoise rather than the hare.

At the central bank's last meeting on June, policy makers reiterated the need for a "prolonged" tightening cycle as part of that strategy - but for how long they did not say.

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